CFD Trading Pros and Cons

At the designated contract time, a buyer must pay the seller the difference in price of the asset. This is what is known as a contract for difference or CFD for short. CFD trading revolves around profit on price movements. The advantage here is that the buyer does not own any assets that he/she will trade. A lot of considerable perks that skyrocketed in popularity in the previous decade is what trading CFD offers.

CFD Advantages:

  1. The leverage is higher

Traditional trading provides less leverage than CFDs. Beware that higher leverage can amplify a trader’s losses if reckless.

2. One Platform Gives Global Market Access

Products are being offered by multiple CFD brokers in all the major markets in the world. This grants access 24/7. These worldwide markets provide investors a vast array to trade their CFDs.  

3. No Borrowing Stock or Shorting Rules

Shorting is something specific markets prohibit. The instrument is required to be borrowed by the trader before selling short or buy and sell positions having different margin requirements. Since the trader does not possess any asset, CFD instruments can be shorted when the trader chooses sans borrowing costs.

4. Zero Fees Professional Execution

Stops, limits, and contingent orders, like ‘one cancels the other’ and ‘if done’ are some of the order types that CFD brokers offer that are similar to traditional brokers. A fee for the service will be charged by some brokers that offer guaranteed stops.

When the trader pays the spread, brokers earn their pay. Commissions or fees are another route brokers can take to make money. A trader has to pay the ask price to buy. A trader must pay the bid price to sell. Depending on the randomness of the asset, the spread may be huge or little. However, fixed spreads are frequently available.

5. No Day Trading Prerequisites

The CFD market is not restricting traders to trade with a minimum amount of capital or limit the amount of day trades with a single account. With that being said, accounts may be opened for $1000 though $2000 and $5000 are unequivocally minimum deposits among the CFD market.

6. A Wide Array of Trading Opportunities

Stock, index, currency, treasury, sector, and commodity CFDs are what brokers offer in the present. This allows CFDs to be an alternative to speculators who are interested in diversifying their financial vehicles to exchanges.

CFD Disadvantages:

  1. Spread is Paid by the Trader

Spread ruins the chance of a small profit from small moves. Traders must pay spreads upon entry and exit. 

2. Feeble Industry Regulation

The amount of sublime CFD brokers are many, but it is salient to scrutinise a broker’s background before opening an account. This is because the CFD industry is not regulated highly. 

3. Risks

CFD trading is quick and compels close monitoring. With that being said, the risks are something traders must become aware of. These are not light risks either. These are liquidity and leverage risks.