CFD’s and forex trading have gained immense popularity over the last several years, especially in the U.K. and Australia due to the extremely high leverage that each financial instrument offers.  In typical stock trading, investors are generally offered no leverage; therefore, traders are only able to hold positions they have cash to hold.  This protects traders from large, quick losses, but it also leads to slower profits.

In CFD and forex trading, however, traders can access huge amounts of leverage of up to 100:1 and even higher.  This means that with margin of only $1,000, a trader can hold a $100,000 position in the market.  There are several huge advantages to trading equity CFD’s versus traditional equity trading.  In this article, we are going to discuss a few of the common advantages of CFD trading and then discuss 1 specific CFD strategy that helps a trader generate reliable cash flow.

Leverage—A Savior and A Destroyer

Leverage has incredible power to both help and destroy a trader; thus, any strategy a trader develops which includes the use of leverage must include extremely tight risk management.  In the forex market, traders are usually able to leverage at least 100:1, and some brokers will allow even more leverage.  In CFD trading, the leverage is generally 20:1.  This leverage allows a trader to trade the underlying stock with only a 5% margin deposit, which is quite different from standard equity trading.

Short-Selling

It is very easy to short a stock by selling a CFD that tracks the underlying asset.  Transaction fees are very cheap for short-selling CFD’s compared to short-selling a traditional stock.

No Expiry

When a trader buys or sells a CFD, there is no expiry date as with options; therefore, he can hold the trade for as little or as long as he likes in hopes of earning a profit.  The downside of this is that a trader is paying a small fee every day to hold the CFD, whether he is long or short, so CFD’s do not lend themselves well to a buy-and-hold approach, but they can be a very useful addition to a short-term trading strategy, similar to forex scalping.

Time To Generate Cash Flow

Cash is king, and traders have learned this more over the last two years than perhaps any other time in history.  Traders and investors who were sitting on large amounts of cash in 2008 and 2009 were able to swoop in and pick up valuable assets at significantly discounted prices due to falling prices in most markets.  Therefore, many traders want to develop trading strategies that generate reliable cash flow.

Trading financial markets always carries a certain degree of risk, and the loss of funds is always possible, but there are way to focus on cash flow generation when trading CFD’s.  CFD’s, of course, track the underlying asset and allow traders to earn dividends just as if they were trading the real stock.  Since CFD’s tend to get expensive when held over the long-term, it is not good for traders to hold CFD’s for months in order to earn a dividend payout.  However, traders can buy a stock just days or weeks before an ex-dividend date, and they will earn the dividend payout.

In fact, as long as a trader buys the CFD before the ex-div date, he will receive the dividend payout, even if it is only 1 day prior.  Therefore, one way a trader can generate cash flow trading CFD’s is to buy strong uptrending stocks that are about to hit an ex-div date.  A trader will then make money 2 ways:  1) by the capital appreciation of the stock and 2) by the dividend payout.

Remember, trading forex or any financial market is always risky, and no strategy is free from risk, but trading CFD’s for cash flow is definitely a strategy to consider.