It is the great leveraging benefit of a derivative instrument like CFDS that makes it so popular amongst traders. CFD trading has found favor mainly due to the fact that you do not have to physically own the stock and can still speculate on its price movements paying just margin money. The fact that the cfd price mirrors the price movement of the stock in question in the cash market gives it the credibility and liquidity it requires.
Many traders do not want to go through the hassle of researching into the balance sheets of companies and other such detailed reports to be able to invest or trade in them. For them a derivative instrument like CFDS present the ideal opportunity to take exposure to an asset class without having to do much research and by just going by the market trends.
But there are other reasons as well that makes it such a flexible trading instrument.
a) To start with, you are not required to pay any stamp duty on the profits you make and can thus carry home the entire profit. That is because the authorities do not regard speculative trading as actual trading and have kept it out of the purview of taxation. This also means that you cannot offset your losses against future profits.
b) CFD trading can be done for any of the asset classes like stocks, bonds, commodities and even foreign exchange currency and the fact that you are not required to have separate accounts to trade in each of them is another significant benefit. This makes it easy for you to track your trading as well.
c) You can go short as well as long on any asset class using CFDS and that is again a very good feature of CFD trading if you are relatively strong in your technical analysis and can read charts well enough. You can then on a daily basis choose the asset class and specific stocks to go both long and short on them to get the benefit of either price movements. This can be a wonderful hedging strategy and will ensure that you do not lose big time.
d) You can as an investor use CFDS as an effective hedging tool to protect your cash portfolio of stocks.
The above advantages definitely give CFD trading the edge in terms of its flexibility. However, before trading in them, it is better to be aware of the risks as well.