Increased market access
One of the main benefits of trading CFDs in the UK is that it offers traders access to various markets. Investing in CFDs can help you simultaneously gain exposure to multiple global markets. Therefore, you can diversify and potentially increase your opportunities for profits and reduce overall volatility. Additionally, since CFDs are traded over the counter, they don't require the trader to own or buy the underlying asset. It allows you to invest in markets which may typically be difficult to access.
Leverage
CFD traders can achieve greater returns on their investments by taking advantage of leverage. Leverage is when an investor borrows capital from a broker to increase their exposure to the markets. By using leverage, traders can increase their potential profits with only a small initial investment. It works best when markets are volatile, as it amplifies both gains and losses significantly. Additionally, CFD brokers usually offer leverage of up to 200 times the trader's capital, making it a great way to potentiallymaximise returns.
Lower costs
CFDs are generally considered a cost-effective trading option, as they incur lower costs than other asset classes because CFD traders do not have to pay management or commission fees. Their brokerage fees can also be considerably lower than traditional asset classes, allowing traders to keep more profits. Furthermore, CFDs are often traded without an exchange and sometimes don't require additional capital or fees to open a position. To find the best CFD broker in the UK, traders should research and compare fees, customer service and other available features to find the best services for their needs.
Tax benefits
Another advantage of investing in CFDs is that they can be used to reduce the amount of taxes you pay. As a UK trader, you'll benefit from capital gains tax relief on profits generated from CFD trading. Therefore, no tax will be payable if your profits fall within your annual exempt amount. In some cases, CFD traders can benefit from certain deductions for trading losses; for example, spread betting losses can be offset against taxable income.
Trading without ownership
CFDs allow you to trade a wide range of assets without owning them because a CFD is essentially an agreement between the trader and the broker that considers the difference between the opening and closing prices of a particular asset. Therefore, you're not required to purchase any underlying assets, allowing you to speculate on their price movements without holding them physically. Moreover, since CFDs are traded on margin, they allow you to access the markets with a small amount of capital. It makes them suitable for traders who don't have the capital to purchase underlying assets.
CFD trading risks
CFDs are complex financial instruments and come with certain risks. Traders need to be aware of the potential risks involved in CFD trading to make informed decisions about their investments and manage their risk exposure.
Leverage and margin calls
The use of leverage can magnify both profits and losses. If the market moves against you, your losses can be much more significant than expected. Additionally, CFD brokers may issue margin calls which require traders to add additional funds to their accounts to maintain their positions.
Market volatility
Markets are inherently volatile, and CFD traders may find themselves exposed to significant price fluctuations in a short period. It can result in losses that may exceed your initial deposit if the market moves against you.
Counterparty risk
CFDs involve two parties, the trader and the broker. The trader can suffer financial losses if the broker cannot meet their obligations. To minimise counterparty risk, it's essential for traders to carefully choose a reliable broker with good financial standing.