December 2021

CFDs: the pros and cons of using them

CFDs: the pros and cons of using them

The first thing you must consider when determining whether to use CFDs as a trading strategy is that they can be very risky. You should be prepared for this risk and willing to take it on before investing your money into this trading practice. However, if you are willing to put in the time and effort, using this type of investment as a trading strategy may allow you to make more money than if you only trade one type of stock.


Let’s look at some of the advantages and disadvantages of using CFDs as a trading platform so that you have a better idea of what it entails before making any final decisions about investing in them yourself.


Advantages of trading CFDs


A considerable profit in a short amount of time

One significant benefit associated with trading CFDs is that you can make a lot of money in a short amount of time. You can put very little money into the investment and have a good chance at doubling or tripling it. This makes them attractive to those who want to try their hand at trading but don’t have a large sum of money they can invest.


Advantage of price increases

Another benefit, as mentioned above, is that CFDs allow you to take advantage of rapid price increases. If you are using other types of trading strategies, it might take several days for the value of the stock to increase enough to make a large amount of money. While this is not bad, CFDs can give you that same opportunity in just one day.


These advantages mean nothing unless you understand how to work with them and use them as your investment strategy. It’s up to you to choose which direction you want to go next with your investments, but you should do so after considering all factors and considering what will be best for your current situation. If you want this type of trading strategy to work well for you, you’ll need time, so try not to rush anything!


Some disadvantages of CFDs


Brokerage fees

A significant disadvantage associated with CFDs is that you have to pay brokerage fees every time you buy or sell them. This is different from other trading strategies because when you invest in stocks, bonds, or mutual funds, the only fee you are charged is the one for investing. CFDs are an entirely different animal because these fees are built into their value.


Large risk

Another drawback associated with this type of strategy is the large amount of risk it carries with it. While there are significant potential profits, they do not come without a lot of preparation and time put in to make sure everything goes your way. You will need to make sure that any money you put into this strategy can afford to lose if things go wrong. If you cannot afford that kind of risk, you may want to consider another type of trading strategy until you are ready for this one.


Large losses

One final drawback with using CFDs as a trading strategy is that if something goes wrong, the loss you take may be so significant that it sets your progress back months or even years, depending on how much money was lost. You must weigh this risk against the potential reward and ask yourself if this might not happen to you at some point in time. If it won’t, then maybe this is a good fit for you.


In conclusion

Using CFDs as a trading platform presents both advantages and disadvantages depending on how much work and effort has been put into learning about them and developing a sound strategy involving their use. While they can give the trader a nice short-term profit, they also can cause large amounts of financial loss in a brief period. Decide how much risk you are willing to take when considering if this is the right investing strategy for your needs.

An insight into CFD trading for beginners

An insight into CFD trading for beginners

What are CFDs?

CFDs are popular financial instruments that make up part of a trader’s portfolio. However, it may be challenging for beginners in the market to comprehend all of the benefits and drawbacks of investing in and trading CFDs.


What is CFD Trading?

So, what exactly is the significance of this contract? Profit and loss are determined by comparing the difference in price between when a contract is started and when it’s finished.


The difference between the contract price and the market price at the end of the contract is paid by the broker – or “seller” – who enters into this agreement with you. The trader, the “buyer,” will reimburse the broker if a profit is made.


The difference between the price at which you enter and when you exit, multiplied by your number of CFD units, is the key calculation to figure out your profit or loss. CFDs are available in a variety of markets.


Benefits of CFDs

The most significant benefit of CFDs over other forms of trading is their leverage abilities. They can provide up to 20x leverage on short-term contracts, meaning they only need to put down 1/20th of the total value of the position to open it. This means that you can make significant gains with relatively small moves in prices, making it much easier to capitalize on market movements with tight stop losses (explained later).


More benefits:

  • The expiration date for this membership does not need to be changed.
  • It may be used as a hedging strategy.
  • Trade on both rising and falling markets at the same time by enabling a trader to do so.
  • Traders who make markets in underlying assets gain the ability to go long and short on them.
  • Offer a wide range of trading possibilities. A trader may use the same trading platform to access various markets such as commodities, currencies, shares, and indices.
  • Provide a more significant opportunity for profit. CFD dealers typically provide CFDs with higher leverage than other conventional financial products.
  • Traders will enjoy many of the savings associated with conventional trading while avoiding many of the costs.


CFD Margin and Leverage

Trading CFDs necessitates the usage of margin and leverage. One of the primary benefits of CFD trading is that you only need to put down a minor amount of money for the whole trade.


Caveats in using CFDs

Due to these benefits, there are some caveats in using CFDs to stay in the good graces of the FCA (Financial Conduct Authority). There is a rule that states spread betting companies cannot pay out a commission on their earnings; they must reinvest it. This means that if you win with your CFD, you’ll need to pay commission on any profit made (20% for stock assets and 13% for currency assets), but if you lose with your CFD, your losses can offset your commission fees for up to 9 months. This creates a very safe and highly smooth trading experience.


The other major caveat is that the FCA regulates how much leverage you can use. With spread betting companies, you can only use 2:1 leverage (meaning your position only needs 1/2 of the total value to open it). With CFD providers, on the other hand, there are no limitations on how much you want to use. If you want 100:1 leverage (which would mean a £1,000 trade would require an investment of only £10), go right ahead – but expect such high-leverage trades to be extremely risky and volatile!


Opening and closing trades in CFD products are subject to a spread charge. As a consequence, it may be more challenging to achieve tiny gains. Trading CFDs is a complex activity that you should not do without a thorough risk management plan.