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CFD advantages and disadvantages

CFD advantages and disadvantages for private traders

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Traders get a very quick and easy access to the markets through an online broker. What was very difficult a few years ago has become very easy today thanks to the internet.

You may have already identified some of the advantages of CFDs above, but let's break them down and add a few more.

Advantages of CFD trading

    Leverage - The leverage of CFDs is much higher than traditional trading. You can get margin requirements as low as 2%. The price usually depends on the underlying asset. Shares or volatile cryptocurrencies, for example, can reach up to 20%. While low margins allow you to take large positions with less capital, losses will also hit you harder.
    Accessibility - The best CFD brokers allow you to trade all the major markets. With so many markets, this means that CFD trading hours effectively run 24 hours a day. You just need to check your brokers trading hours first.
    Costs - CFD trading in Exness incur minimal costs. You will find that many brokers charge little or no fees for entering and exiting trades. Instead, they make their money when you have to pay the spread. The size of the spread depends on the volatility of the underlying asset. Note that it is usually a fixed spread.
    Fewer short selling rules - Some markets enforce rules that prevent you from going short at certain times. They may require higher margin requirements for short selling than when you are long. However, the CFD market generally does not have such rules because you do not actually own the underlying asset. This means no borrowing or short selling costs.
    Fewer day trading requirements - Some markets require significant capital to start trading. This limits you on how many trades you can make, and therefore how much profit you can make. However, an online CFD trader can set up an account with as little as $1,000 to $5,000.
    Variety - Whatever reaches your centre of interest, you are likely to find a CFD trading vehicle. You can start with CFD FX trading, but also use treasury, commodities, cryptocurrencies and index CFDs.

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Disadvantages of CFD trading

    Underestimating risk - CFDs are complex instruments and you should understand how CFDs work before you start. Despite their simplicity, the risk is underestimated by many traders. Leverage is often used to take on too much risk and traders lose money trading CFDs due to a lack of risk control. Use the leverage consciously and also plan whether you can afford to lose the money.
    Dishonest CFD brokers: Unfortunately, not every provider is serious and correct towards its customers. In CFD trading, fraudsters often try to rip off beginners. This happens through fake websites or unregulated platforms. Make sure that the CFD broker is regulated and has been active on the market for a long time. A good regulation would be, for example, the Financial Conduct Authority FCA or the BaFin.

Why were contracts for difference (CFDs) developed?

CFDs were developed in the 20th century by a major bank in the UK to circumvent a planned stock exchange tax. This tax was to be levied on all transactions with shares. The tax could be avoided thanks to the clever development of contracts for difference. Today they are a popular financial product for private traders.

History facts:

  •     They were developed to circumvent a stock exchange tax
  •     Today they are used by many private traders
  •     They are over-the-counter trades
  •     They are now a regulated financial product

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