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 most important advantages so you can decide if trading in CFDs is right for you. Do you also want to know the disadvantages of CFDs? Click here!
What are CFDs?
Before we dive into the biggest advantages of CFDs, let’s briefly explain what CFDs are. With CFDs, you can speculate on price movements of, for example, stocks. It is possible to use leverage, which allows you to take a relatively large position with a small amount of money.
Why can it be attractive to invest in CFDs? The 9 advantages
- Leverage: You can apply leverage to your investments.
- Speculate on price decreases: You can speculate on a price decrease.
- Transparent price formation: Trading CFDs is similar to normal investing.
- Relative costs: The costs of CFDs are relatively low and commission-free.
- Extensive offering: CFDs are applicable to a wide range of securities.
- Losses limited: You can never lose more than you deposit.
- No expiry date: Unlike futures, CFDs do not expire.
- Hedge: You can protect your shares against decreases with CFDs.
- Demo: You can try investing in CFDs completely for free with a demo.
Advantage 1: Trading with leverage
With CFDs, you can use leverage. Leverage allows you to open a larger investment position with a smaller amount of money. For example, when you use a multiplier of one to ten, you can invest $1.000 with $100. You can benefit from leverage in two ways:
- You need less money to open an investment of a certain size.
- You can benefit more from a small price movement.
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 |
Do you want to know more about leverage in trading? Then read this article:
Advantage 2: speculate on a price decrease
With CFD trading, you can speculate on both rising and falling markets. When using CFDs, you have the option to open a short position. When you go short, you achieve a positive result when the price drops. This makes the CFD an excellent option to profit from falling markets or bad news.
In the table below, you can see how short positions with CFDs can affect your results:
| Brokers | Benefits | Register |
|---|---|---|
 | Buy without commissions. Your capital is at risk. Other fees may apply. | |
 | Speculate with CFD's on increasing & decreasing prices of ! 82% of retail CFD accounts lose money. | |
 | Benefit from low fees, an innovative platform & high security! | |
 | Speculate on price increases and decreases of with a free demo! |
Would you like to learn more about shorting? Then read our extensive article on this subject:
Advantage 3: CFDs are transparent
It is relatively easy for the average investor to understand the prices of CFDs. The price of a CFD closely follows the price of the underlying asset. When the Coca-Cola stock rises, the CFD usually also increases in value.
In addition, CFDs offer additional functionalities that make trading with them more attractive. This includes the ability to use orders. With orders, you can automatically open or close investments at a certain price.
Advantage 4: The costs are relatively low
A major pro of CFDs are the relatively low transaction fees. When you buy a stock through a traditional broker, you often pay a fixed amount of transaction costs. However, with CFD brokers, transaction fees are relative to the amount you invest.
With online CFD brokers, you typically only pay the spread. The spread is a fixed percentage of the value of the investment. This means that even with a smaller amount, you can achieve good results with CFD investments.
If you are eager to know more about the exact costs of investing in CFDs, read our article on this subject:
Advantage 5: extensive range of products
Finally, the extensive range of trading options is a major advantage of CFDs. At most online brokers, you can now choose from CFDs on stocks from various regions. It is also possible to trade in currencies, commodities, options, indices, and cryptocurrencies.
This makes CFD trading very flexible. With one account, you have direct access to all global markets. With more traditional brokers, you typically have to pay extra for this. CFDs are therefore suitable for speculative investments in more exotic investment products.
You can start trading in CFD’s directly with a reliable broker:
Advantage 6: Your losses are limited
Another advantage of investing in CFDs is that you have complete control over your losses. You can set a stop loss, which automatically closes your position at a certain loss.
However, it’s important to note that for ultimate protection, you should place a guaranteed stop loss. With a guaranteed stop loss, your position will be closed at the exact value you fill in. For this guarantee, you will have to pay additional transaction fees. Furthermore, as a retail investor, you cannot lose more money than what you deposit in your investment account.
Advantage 7: CFDs do not expire
When you invest in options or futures, you have to deal with an expiration date. This means that the position is automatically closed on a specific date. This is usually not the case with CFDs, which gives you more flexibility in your CFD investments, and allows you to keep your position open for longer.
Advantage 8: Hedging your portfolio
CFDs are also suitable for hedging your stock portfolio. It can be difficult to protect yourself against a temporary decline in stock prices when you own shares yourself. Selling and buying all your shares again can be costly due to transaction costs. By hedging your positions with a CFD, you can skip this step.
Hedging involves taking a counterposition. For example, if you own Apple shares, and you expect them to temporarily decline, you can take a temporary short position with a CFD.
Advantage 9: test it with a demo
Another major advantage of CFD investing is that you can try the possibilities for free with a demo account. Many investors lose money in the beginning because they have no idea what they are doing. By practising with a demo, you can discover whether CFD trading is right for you.
Do you want to know where you can try CFD investing for free without a demo? Use the button below to compare demo accounts from 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 mainly intended for short-term speculation: you cannot use CFDs for long-term investments. Since CFDs are high risk, you should only invest in CFDs with money you can truly afford to lose.
If you enjoy speculating in the short term, CFDs can be appealing. With CFDs, you can quickly respond to price fluctuations and even take larger positions thanks to the presence of leverage. Personally, I used CFDs during the corona pandemic to go short on the oil price. When the corona pandemic broke out, the oil price declined sharply, eventually even dropping below 0.
