Why Investors Choose to Trade CFDs Over Traditional Trading

LONDON, May 23, 2012 /PRNewswire/ --

In the following guide, find out not only why investors choose to trade the financial markets using CFDs over traditional trading but also how you can start trading with only a small initial deposit.

What is CFD Trading?

A CFD (Contract for Difference) is an agreement between two parties to exchange the difference between the opening and closing price of a contract.

As a derivatives product, investors can take a position on over 12,000 financial instruments with a City Index CFD trading account.

CFD trading enables investors to potentially profit from a market's movement regardless of if it is rising or falling.

How do Investors Trade CFDs?

Commonly, investors use CFDs to trade on the future price movement of the underlying instrument on which their contract is based such as the FTSE 100 Index.

As mentioned above; they can profit from a market that is both rising and falling.

For example, if they expect a market to fall they sell (go short), allowing them to profit from a falling price. Alternatively, if they expect the market to rise, they buy (go long) - similarly allowing them to profit from a rising price.

However, if the market moves against their position - they can incur significant losses; making managing risk imperative in their CFD trading strategy.

In addition, investors use CFDs to hedge their portfolios; allowing them to offset any potential loss in value of their physical investments.

CFD Trading vs. Traditional Trading

Investors commonly choose to trade CFDs over traditional forms of trading because of its key features, such as:

• Free from Stamp Duty*
• Leverage Feature
• Ability to Go Long and Short

The CFD leverage feature enables investors to take a position for only a small initial deposit - a fraction of the total trade value such as 10%.

CFD Leverage Example:

For example, say you wished to purchase 5,000 Barclays shares and its current share value is 250p.

The leverage or 'margin' rate for Barclays when trading CFDs with City Index is presently at 15%.

Therefore, you are required to pay 15% of the total trade value.

This means that you pay an initial deposit of £1425, i.e. 5,000 x 190p x 15%.

So essentially for an initial deposit of £1,425, you have gained exposure to a £9,500 (5,000 x 190p) position in Barclays.

Why do Investors Trade CFDs with City Index?

Today more and more individual investors are discovering the benefits of derivatives, and many of them are discovering them through a City Index CFD trading platform.

As a group, they transact in excess of 1.5 million trades every month in over 50 countries; providing access to a wide range of instruments including margined foreign exchange, CFDs and, in the UK, financial spread betting.

City Index constantly looks to improve the performance of their platforms and expand their range of services.

As a result, their customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support. Visit http://www.cityindex.co.uk/ for details.

*CFD trading is exempt from UK stamp duty. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.

SOURCE City Index