Benefits of using CFDs for trading in Mena

trading in Mena

Investors looking for more flexibility, options, and better returns on their trading can opt to trade in CFDs (Contract For Difference). 

The contracts are derivative financial products that allow you to reap the benefits of an underlying asset’s performance without actually owning the asset.

The basic idea behind investing in CFDs is that people can make profits or losses during market fluctuation, just like traders who buy and sell stocks/shares. 

However, unlike equities, investors do not have to own the shares or commodities or even deposit cash into their account before placing a bet. 

With CFDs, what you do is leverage your customer margin against the broker’s balance sheet so that they carry out all trades on your behalf. 

It means you don’t even have to pay for the total value of the asset you are investing in, but instead, just a fraction known as “margin”.

So why are investors turning towards this particular type of investment? 

Let’s look at some of the benefits offered by CFDs for Mena investors.

Portfolio benefits 

Investors’ portfolios consist of both physical assets, such as real estate and stocks, together with financial assets, including equities, bonds, money market instruments etc. 

Through CFDs, an investor can create short positions on any asset in his portfolio without actually owning/transferring it. 

CFDs (despite their name) don’t require ownership; they only require that the client makes good on the difference between opening and closing prices. 

Financial risk mitigation 

With most investments, if you lock in your capital today, you would hope to make returns from price increases. 

But if the market goes down, you can find that your capital has been locked into a product that is now worth less than it was when you purchased it. 

It is often referred to as gearing risk and means that any losses accrued over some time will have a magnified effect on your portfolio. 

CFDs, however, allow investors to use leverage without limiting their downside exposure. 

I.e. If an investor holds ten contracts with options to sell at $10 each, he could lose or gain ten times his account value if the market moves against them by just 1%.

Whereas in traditional trading strategies where there are no longs or shorts, x1 movement would result in x1 loss for the trader. 

Benefits of using CFDs for trading in Mena

  1. Traders can make either profits or losses through market fluctuation without owning the underlying asset.
  1. No need to physically own any physical commodity/asset before trading.
  1. Profit margins are significantly lower when compared with buying & selling shares/commodities directly.
  1. Transactions are carried out through the broker’s balance sheet.
  1. Margin is usually less than 10% of the total transaction value.
  1. Unlike shares & commodities, traders do not have stock/commodity ownership.
  1. No actual transaction takes place as derivative contracts are made through brokers.
  2. In case of bankruptcy, client losses will be limited to the margin amount.
  1. Margin call is a situation where clients must deposit additional money because of a fall in market value.
  1. CFDs trading requires technical knowledge and expertise, which may not be available to everyone due to substantial market fluctuations.
  1. CFDs are derivative contracts that do not involve the actual exchange of assets.
  1. Traders pay brokerage fees on both entry and exit points of the trade, unlike stock market derivatives, where only exit point charges are levied.
  2. Leverage decreases return on investment if the trader does not track market fluctuations accurately.
  1. Trading volume is lower than that for sell transactions as demand & supply of these instruments is limited.
  1. Due to low margin requirements, many traders may create sudden demand or supply shocks in underlying asset prices. This volatility can be attributed to higher trading volume in this segment. 

In addition, lack of liquidity implies that significant transactions may push up or down the price of an asset and traders must continuously track the prices and take appropriate action to ensure that they do not result in losses.

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