You May Not Know About
The Contract For Difference (CFD) has its own set of advantages and disadvantages that traders need to know. Knowledge in this strategy is very important so you can counter possible losses on your side. Trading CFDs remains popular despite being highly risky thanks to those traders who were able to learn the ways of CFD first before trading. If you want to know more about CFD, here are the top 13 facts about CFD trading.
1. You can apply leverage into your investments
In CFD trading, there is leverage. With it, you can gain a lot of profit just with a small investment. A trader can benefit from leverage in two ways – less money when opening investment and benefit from small price changes.
2. You can take advantage even if the price falls
CFD trading evolves on the trader’s speculation on the rise and fall of the market price. You can have a short position with CFDs and it is possible to gain from it even if the price drops. CFD is the best option if you want to take advantage of falling markets.
3. You can start trading with a demo account for free
Demo accounts are very useful to new traders. With CFD, you can’t lose your money that easily. You can practice with demo accounts for free.
4. CFD trading is transparent
New investors can easily understand the prices associated with CFDs. Usually, the CFD price follows the price of its underlying asset. CFD is also very attractive thanks to its additional functionalities. Orders can be placed easily and there are a lot of advantages associated with CFD trading.
5. The losses incurred in CFD trading is limited
You have complete control of your losses in CFD trading. You can use stop loss for this. Using a stop loss, your trading position will be closed automatically if a certain loss is achieved.
6. CFD trading is free from commissions and other related costs
Most CFD brokers do not charge you with the commission and other related costs. What you have to pay in CFD is the spread or the fixed percentage of the investment value.
7. You have a lot of options in CFD
The wide range of options in CFD is one of its biggest advantages. With the right CFD broker, you can trade on shares, commodities, currencies, options, cryptocurrencies, and ETF’s. All these options make trading very easy and flexible. Also, if you are an investor with a high interest in exotic investment products then CFD is the perfect option for you.
8. There are risks associated with leverage
Leverage can be advantageous in CFD trading. But if you take a lot of risks, you might end up on its negative side.
9. The financial costs can become a problem with long term positions
You may not pay commission on CFD but you need to pay for the financing costs. This makes CFD less suitable if you aim for long term investments.
10. You must give a lot of your time in trading
As you invest your money in CFD, you also need to invest a lot of your time with it.
11. You can encounter psychological pressure
When trading CFD, it is important to maintain a cool head. You need a high level of self-control since it is an easy-to-open and large investment.
12. You need to pay the extra spread
You are obliged to pay extra fees if you choose to trade with leverage. Most importantly, remember that you must pay the spread in all of the shares you purchased.
13. You don’t own real shares
One huge drawback of trading CFDs is that you don’t actually own the shares. The company will not give you the voting rights if you trade on CFD.