What are the advantages of CFDs?
CFD trading is still very popular. But what are the biggest advantages and disadvantages of investing in CFDs? In this article, we list the main benefits so you can decide if trading in CFDs is right for you. Want to know the disadvantages of CFDs too? Click here!
What are CFDs?
Before we delve into the biggest advantages of CFDs, let’s briefly explain what CFDs are. CFDs allow you to speculate on the rise and fall of, for example, a stock. You can use leverage, which enables you to take a relatively large position with a small amount of money.
Want to learn more about investing in CFDs? Read here to find out how CFD trading works.
Why invest in CFDs? The 9 benefits
- Leverage: You can apply leverage to your investments.
- Speculate on price drops: You can speculate on a price drop.
- Transparent pricing: Trading in CFDs is comparable to regular investing.
- Relative costs: CFD costs are relatively low and commission-free.
- Extensive selection: CFDs are applicable to a wide range of securities.
- Limited losses: You can never lose more than you deposited.
- No expiration date: Unlike futures, for example, CFDs do not expire.
- Hedging: You can protect your shares against drops with CFDs.
- Demo: You can try investing in CFDs for free with a demo account.
Benefit 1: Trading with leverage
With CFDs, you can use leverage. Leverage enables you to open a larger investment position with a smaller amount of money. For example, if you use a multiplier of one to ten, you can invest $1000 with just $100. You can use leverage in two ways:
- You need less money to open an investment of a certain size.
- You can benefit more from small price fluctuations.
In the table below, you can see how leverage can affect your investment results:
| CFD-transaction 1:10 leverage | Normal transaction | |
|---|---|---|
| Your position | $1000 | $1000 |
| 10% increase | $2000 | $1100 |
| 10% decrease | $0 | $900 |
Want to learn more about the workings of leverage in trading? Then read this article:
Benefit 2: Speculating on price drops
When trading in CFDs, you can speculate on both rising and falling markets. You have the option to short with CFDs. When you short, you achieve a positive result when the price drops. This makes CFDs an excellent option for speculating on declining markets or bad news.
In the table below, you can see how short positions with CFDs can affect your results:
| Long | Short | |
|---|---|---|
| Price goes up 10% | +10% | -10% |
| Price goes down 10% | -10% | +10% |
Do you want to know more about shorting? Then read our comprehensive article on this topic:
Advantage 3: Transparent CFD trading
It is relatively easy for the average investor to understand the price movements of CFDs. The price of a CFD closely follows the price of the underlying asset. For example, if Coca-Cola stock rises, the CFD will generally also increase in value.
In addition, CFDs offer various additional functionalities that make trading with them even more attractive. These include, for example, the possibility to use orders. With orders, you can automatically open or close investments at a certain price.
Advantage 4: Relative costs
A major advantage of CFDs is their relative transaction costs. When you buy a stock with a traditional broker, you often pay a fixed transaction fee. With CFD brokers, however, transaction costs are relative to the amount you invest.
With online CFD brokers, you usually only pay the spread. The spread is a fixed percentage of the value of the investment. This allows you to achieve good results with smaller investments in CFDs.
Do you want to know more about the exact costs of investing in CFDs? Then read our article on this topic:
Advantage 5: Wide range of products
Finally, the wide range of products is a major advantage of CFDs. With most online brokers, you can choose from CFDs on stocks from all regions of the world. It is also possible to trade in currencies, commodities, options, indices, and cryptocurrencies, for example. This wide range of products makes CFD trading very flexible.
With one account, you have direct access to all global markets. With more traditional brokers, you often have to pay extra for this. CFDs are therefore suitable for speculative investments in more exotic investment products.
Do you want to know where you can best take advantage of the benefits of investing in CFDs? Then have a look at our overview of the best CFD brokers:
Advantage 6: Limited losses
Another advantage of investing in CFDs is that you have full control over your losses. You can set a stop loss, which automatically closes your position at a certain loss.
However, keep in mind that for ultimate protection, you should place a guaranteed stop loss. With a guaranteed stop loss, you never pay more than indicated. However, you do pay extra transaction fees for a guaranteed stop loss. Additionally, it’s important to know that as a retail investor, you can never lose more money than you deposit into your investment account.
Advantage 7: CFDs do not expire.
When investing in options or futures, you have to deal with an expiration date. This means that the position is automatically closed on a certain date. With CFDs, this is usually not the case, giving you more flexibility in your CFD investments and allowing you to hold positions for longer.
Advantage 8: hedging your portfolio.
CFDs are also suitable for hedging your stock portfolio. When you own stocks yourself, it’s difficult to protect yourself against a temporary decline in price. Selling and buying back all your stocks is expensive due to transaction costs. By hedging your positions with a CFD, you can skip this step.
Hedging involves taking a position opposite to your current position. For example, if you own shares in Apple and expect them to temporarily decline, you can take a temporary short position with a CFD. This way, you can use CFDs to protect your portfolio against expected price declines.
Advantage 9: try it out with a demo.
Another great advantage of CFD investing is that you can try out the possibilities for free with a demo. Many investors lose money at the beginning because they have no idea what they are doing. By practising with a demo, you can discover whether this method of trading is right for you without any risk.
If you want to know where you can try out CFD investing for free without a demo, use the button below to compare the demo accounts of different providers:
Who is CFD investing suitable for?
CFDs are not suitable for inexperienced investors. CFDs are speculative investment products that allow you to speculate on both rising and falling prices. CFDs are primarily intended for short-term speculation: you cannot use CFDs for long-term investments. Due to the high risk, only invest money in CFDs that you can really afford to lose.
If you enjoy or are interested in short-term speculation, CFDs can be interesting. With CFDs, you can quickly respond to price fluctuations and even take larger positions thanks to the presence of leverage. For example, during the COVID-19 pandemic, I used CFDs to short the oil price. When the pandemic broke out, the price of oil dropped sharply, eventually even dipping below zero.
