What are the disadvantages of CFDs?

Are you curious about the disadvantages of investing in CFDs? In this article, I discuss the biggest drawbacks of trading in CFDs. Not sure what CFDs are? I explain it here!

What are the main cons of CFDs?

• Leverage risks: leverage brings extra risks
• Financing costs: financing costs make long-term investments impossible.
• Time: you need more time for active trading in CFDs.
• Psychological pressure: psychological pressure is higher with CFD investments.
• Higher transaction fees: you pay higher transaction costs due to leverage.
• No real stocks: you can never become a co-owner of the company
• Regulated abroad: carefully research the reliability of CFD brokers.
• Unclear pricing: the price is often determined decentrally.

Disadvantage 1: the risks of leverage

When you invest in CFDs, you can use leverage. With leverage, you can open a larger investment position with a smaller amount of money. As a result, both your potential profit and potential loss increase. In this article, I explain in more detail how this works.

When the price of a stock falls by $10, you would achieve the following results:

• Normally, you would lose $10 in this case
• With a leverage of 1:10, you would lose $100 with the same investment

In practice, many consumers achieve a negative result with leverage products. This is typically because they take too much risk. It is important to remember that applying a high leverage accelerates results. It is always critical to keep enough margin on your account.

You can read more about how the margin call works with leverage trading here. You can also read more about the risks of leverage here.

Disadvantage 2: Financing costs

Another disadvantage of CFDs is the fact that you have to pay financing costs. The broker puts most of the investment in. Because you pay financing costs, CFDs are less suitable for longer-term investments. You should use CFDs for investments shorter than a year.

If you want to read more details about the costs of investing in CFDs, read this article.

Disadvantage 3: You need more time

Another con of investing in CFDs is the fact that you also need to invest more time. When you physically buy stocks and start a portfolio, you don’t have to pay much attention to it. However, when you start speculating with CFDs, you are an active trader. If you want to achieve positive results, you need a good strategy. Evaluating and executing CFD investments also costs a lot of money. Click here to read more about speculation.

Disadvantage 4: Psychological pressure

Finally, it is even more important (and perhaps more difficult) to keep a cool head when investing in CFDs. Because it is very easy to open large investments, a higher degree of self-control is required. Many people, driven by greed, go too far initially and lose their entire investment as a result. Do you want to learn how to better control your emotions when trading CFDs? Then read this article:

Disadvantage 5: higher transaction costs

When you invest with leverage, you pay transactions on your entire investment. When you use a leverage of 1:10, you also buy ten times as many shares. It is then essential to remember that you pay the spread on all the shares you buy. Of course, you also benefit from the potential profit of your investment.

Furthermore, be aware that you pay financing costs on the full amount of your investment. This can significantly increase your costs in proportion to the amount you deposit.

For example, if you invest in a stock with transaction costs of $0.20 and your investment is $100:

• With a normal investment, you pay $0.20 or 0.2% in costs
• With a leverage of 1:10, you pay $2 or 2% in costs

Disadvantage 6: you never invest in real stocks

Another disadvantage of CFDs is that you can never trade in a real stock with them. With a CFD, you never receive voting rights, so you cannot vote within the company. If you want to become a real owner of a company, you need to buy the stock yourself.

Some CFD brokers also allow you to buy physical stocks. An example of a broker where you can do this is eToro.

Disadvantage 7: regulated abroad

Another potential con of investing in CFDs is that CFD brokers are often regulated abroad. For example, many foreign brokers are supervised in Cyprus. This country is known to be slightly less strict than other European regulators. Therefore, do thorough research into the reliability of the broker before you start trading.

Disadvantage 8: less transparent pricing

On the stock market, the price of a share is fully determined by supply and demand. This does not happen centrally with a CFD broker, which typically makes it more difficult to determine whether you receive a fair price.

Do the advantages of CFDs outweigh the disadvantages?

We can say with conviction that trading in CFDs comes with its fair share of pros and cons. For some investors, the advantages outweigh the disadvantages. Thanks to the introduction of CFDs, investors can also trade in stocks and currencies with small amounts.

For other investors, the disadvantages do not outweigh the advantages. For example, if you have little time or prefer to avoid big risks, CFDs are definitely not suitable. Therefore, it is important to make a good assessment yourself and then decide whether trading CFDs is right for you.

Do you want to try investing in CFDs? Practice with a free demo before making your first deposit! Click here to compare brokers where you can open a free demo. Of course, you can also view our full overview of brokers.