Why Retail Investors Should Opt for CFD Trading

Small Investment, Big Gains

As a small investor has limited funds when compared with corporate and institutional investors, there are many commodities and stocks that are out of reach because of the immensely high prices they sell at. A CFD trade requires an outlay of just a fraction of the total investment value. This advantage lets small individual investors with limited funds take big positions in the market.

For example, investor S prefers to trade in shares directly. He buys 100 shares of company C at £50 apiece bringing his total investment to £5,000. Investor C has a much more limited budget. He takes a long position on CFDs of 100 company C shares. His broker requires that he maintain a 5% initial margin. So, his initial outlay is 5% of £5,000 which is £250. Interest and maintenance charges do apply on investor C’s investment, adding to his costs but still his total investment cost does not come anywhere near investor S’s £5,000 investment.

The price of the share zooms up to £100. Now, investor S stands to gain £10,000 if he sells his shares in the market. The total gain he will make from the transaction is (£10,000 – £5000 =) £5000. He has doubled his original investment.

Investor C can close his long position in the share and get the change in price for every share he has a CFD on. His broker pays him £50 (change in price) x 100 shares = £5,000 when he closes the trade. Although investor C gets the same sum total from the transaction, his profit is £5000 – £150 = £4850. He has multiplied his initial investment many times over. Although interest, commission and fees are deducted from this amount, investor C has still made a far more profitable transaction than S.

Avoid Stamp Duty

As there is no physical exchange of assets, the CFD investor avoids stamp duty that applies on regular share purchase and sale. When the exposure is high, this translates into significant savings for the investor.

Flexibility to Switch Quickly

CFDs give the investor great flexibility to switch from non performing investments to potential winners quickly and with less cost. Global interbank rates are now low and this has made CFD trading a much cheaper option than before. In fact, when calculated for the short term, holding a position in a share through CFDs is much cheaper than actually owning the shares. This is in spite of the charges, commission and interest levied from investor accounts by CFD brokers.

Leave a Reply

Your email address will not be published. Required fields are marked *