CFDs are short for “contracts for difference”, and they are one of the unique opportunities to make money trading. These contracts are a way to profit off of price movement of an asset without actually owning it. This trading method is different from others as this type of trade does not utilize any commodity, stock, or futures exchanges. As with all things in life, this type of trading comes with its advantages and disadvantages.
Advantages of CFDs
CFDs have one unique advantage on their side that makes them very interesting to all traders. CFDs leverage is a lot higher than in traditional trading. If the stock has an asking price of 10 dollars, you would need to pay $500 (50% margin account) to buy 100 shares in conventional trading. However, the CFD brokers must be selected carefully, since they only require a 5% margin, which is only $50 in this case.
This is very attractive for traders as they do not have to invest as much money to be trading with the same amount of stocks.
A vast range of Markets is also one of the advantages of CFD. You can use CFDs to trade over 17000 markets, including cryptocurrencies, forex, and commodities among the rest. Usually, your platform will allow you to change on all these markets without ever logging out. These conveniences may seem simple and not relevant, but having these small benefits is extremely important for experienced traders.
It is also important to mention that CFDs do not have an expiration date, unlike some other types of investments like futures. This means that traders can patiently wait when taking long positions. Of course, this is accompanied by fewer restrictions on closing a position, which makes it perfect for those who like waiting for the right time to sell.
Disadvantages of CFDs
After mentioning leverage as one of the advantages of CFDs, it is a bit hard to understand how leverage can also be a disadvantage at the same time. However, this can be a double-edged sword because even though your profits are multiplied, so are your losses. You are winning or losing the same amount of money you would if you bought the shares in traditional trading. Still, because you didn’t invest as much money, these winning and losses, percentage-wise compared to your investment, are enormous. In this sense, CFDs are what one would call high risk, high reward play.
While on the same page of losses, one other disadvantage is that the trader needs enough funds to support the trade. This means that if the position moves against the trader, it will affect its cash balance. This is troublesome because if the position moves so far that the trader doesn’t have enough credit to support the trade, they will be subject to a “Margin Call,” which means that they will need to deposit more money into the account or close the position and deal with the losses. This shows another disadvantage. When confronted with this situation, many traders will try to save their assets and try to invest more money to “stay in the game.” This can lead to overtrading and acting not based on data and knowledge but out of fear or greed. These situations can hinder the trader and even put a bad name on the financial option like this.
These disadvantages should never be something you overlook, but it is easy to see that all the disadvantages have human input involved. CFDs can be bad for traders if they get carried away and become emotional, but it would never be a problem for a disciplined trader. So if you know that you are an impulsive trader, maybe CFDs are not your thing. CFDs offer many advantages for the traders, and high possible ROI is very alluring, make sure you stay calm and smart, and you too can see the worth in trading CFDs.