For many retail investors seeing the market above 7000 or the psychological barrier as it came to be known is a huge benchmark and very positive for those who have tracked the market up from the levels it fell to during the market crash in 2008. However this level poses more questions than it gives answers as we now find ourselves venturing into previously unchartered territory leaving many investors and traders wondering if now is the best time to look at taking profit and whether this is the top of the trend. If this viewpoint is to be the case then most traditional investors would be left wondering where best to place their money once they remove it from the market, its long been known that holding money in cash deposits although very safe does not satisfy savvy investors who strive to gain more from their money and will not be happy to settle with the below par interest rates offered by many banks or building societies.
The need for a suitable alternative to holding the underlying stock has been around for 15 years yet very few people in the retail sector fully understood it or even had knowledge in it. Trading CFD’s has several major advantages and these have firmly moved CFD’s into the spotlight increasing the popularity of this instrument over the last few years as the logical alternative to traditional stock investments. one of the main features is that you can speculate on both directions in the market by taking long and short positions, this allows investors who feel a drop in the market is coming to capitalise on the drop instead of pulling out of the market altogether. Although the benefits are vast there are risks associated that investors have to be aware of, for instance in traditional shareholding you can only lose 100% of your investment yet due to the leverage nature of CFD’s it’s possible to lose more than your initial deposit so stop losses and risk management would always be advised.
One of the big reasons why CFD’s now make up to 60% of all trades placed on the LSE on a daily basis is due to the fact that investors with a smaller level of capital who still wish to remain diverse across a number of positions or sectors can now do exactly that as you place trades via deposits instead of paying the full value of the position which allows them a much larger market exposure. Without the use of leverage investors will find traditional stock market investments can become very capital intensive as all positions have to be fully funded. CFD’s make it much easier to gain access to global markets and investments for a much lower cost to their capital and also it is far easier to move in and out of positions, in most cases via the click of a button. Another attractive feature to CFD’s is that you are not trading the underlying assets so therefore are not subjected to stamp duty tax but will still be entitled to dividends if you hold a long position in the company.
The bottom line is that lower margin rates in CFD trades can magnify profits but investors always have to mindful of the fact it can magnify losses so it’s wise to seek professional advice when dealing with them. CFD advisory services offer easy access to global markets and a wealth of other trading options such as commodities, currency and index trades providing an excellent alternative for certain types of traders or strategies.