Advantages of Direct Market Access CFDs
CFDs have become one of the most popular traded over-the counter derivative products and for many good reasons. CFDs have provided traders with many advantages that have made them such a popular product. FP Markets offers a Direct Market Access CFD pricing model for all of its Australian and global CFD products it offers where there is an underlying exchange upon which an asset is traded adding transparency to the list of advantages.
One of the key benefits of CFDs is that it helps better utilise capital by offering leverage. When trading CFDs a small initial margin is required when taking out a much larger position when you consider the notional value or face value of the CFD Contract. This means that with very little capital a CFD trader can access much greater profits.
However, you should be aware that leverage also means potential to access far greater losses. You should also be aware that you can lose more than the amount you have lodged in your trading account.
Short selling enables a CFD trader to sell a CFD contract at a high price (with the anticipation the price will go down) and buy it back at a lower price (assuming the price does go down) to gain a profit. This enables CFD traders to profit from not only rising prices in the underlying assets which are traded on an underlying market but also falling prices.
Whilst this ability to sell a CFD before buying a CFD is not available for every single CFD we offer, FP Markets does offer a large range of underlying assets whereby the CFD trader can sell the CFD before he buys the CFD.
Given that you can take a short position in most of the CFDs we offer (by selling a CFD before you have bought a CFD), they are an ideal tool for hedging purposes. Many investor’s equity portfolios remain vulnerable to market downturns and the cost of exiting and re-entering are far too high and risky. CFDs enable traders to lock in the value of an equity portfolio by holding short CFD positions that mirror that in the equity portfolio. This means for every dollar the equity portfolio loses in a falling market the CFD portfolio will gain. With CFDs only requiring a very small initial margin to hold an open position this means a minimal outlay at little cost (subject to the size of the equity portfolio being hedged).
Index CFDs enable people to hedge a large portfolio without having to sell individual Equity CFDs.
Lower Transaction Costs
Unlike traditional equities (share) trading, CFDs have very low transaction costs. Many high volume traders choose to trade with FP Markets due to our flexible and competitive transaction costs.
Relative Simplicity in Trading
Direct Market Access CFDs prices mirror the relevant underlying asset being traded on the underlying exchanges (where there is an underlying exchange upon which an asset is traded). Some other derivatives products may not always move in line with the underlying asset, such as options and futures, and therefore can be very difficult to trade. Also, the majority of CFDs offered by FP Markets have no expiry, and therefore open CFD contracts can be held open as long as you wish provided the trading account has sufficient “free equity” to cover initial margins and any variation margins.
Dividends & Corporate Actions
For all equity CFDs, traders are entitled to a cash equivalent of any dividend that is paid by the actual company listed on a relevant underlying exchange to its shareholders. Another advantage of CFDs is that the cash equivalent of the dividend is paid on the Ex Date rather than the pay date as is the case when trading equities. You also have the ability to participate in other corporate actions such as share splits and rights issues. For full details, we refer you to the Product Disclosure Statement
CFDs have the added benefit of enabling traders to use credit variation margins (i.e. unrealised profits) as either initial margin to open new positions or as an offset to debit margins (i.e. unrealised losses). CFDs are also cash settled when they are closed out. CFD contracts closed by the end of a trading day do not incur financing fees.Open a Live Account NOW