Advantages and disadvantages of trading in CFDs
CFD trading is still very popular. But what are the biggest advantages and disadvantages of trading in CFDs? In this article, we answer that question and help you decide whether trading CFDs is for you.
What are CFDs?
Before we address the biggest benefits and disadvantages of CFDs, we will briefly address what CFDs are. With CFDs, you can speculate on price increases and price falls of, for example, a share. It is possible to use a leverage that allows you to open a relatively large position with a small amount of money.
Do you want to know more about trading in CFDs? Read directly how CFD trading works.
What are the biggest benefits of CFDs?
- Leverage: You can apply leverage to your investments.
- Take advantage of price falls: you can speculate on a price drop.
- Similar to normal investing: trading CFDs is similar to normal investing.
- Relative costs: the costs of CFDs are relative and free off commissions.
- Extensive options: CFDs can be applied to a wide range of securities.
- Losses are limited: you can never lose more than you deposit.
- Demo: you can try trading in CFDs completely free with a demo.
What are the main drawbacks of CFDs?
- Leverage risks: leverage also entails additional risks
- Financing costs: financing costs make investments impossible in the long term.
- Time: You need more time to actively trade in CFDs.
- Psychological pressure: psychological pressure is higher when trading in CFDs.
- Extra spread: you pay the spread over your entire investment.
- No real shares: you can never co-own the company.
What are the advantages of CFDs?
Below we discuss the benefits of trading in CFDs.
With CFDs, you can use a so-called leverage. Leverage makes it possible to make a larger investment with a smaller amount of money. For example, if you use a multiplier of one to ten you can invest $1000 with $100. There are two ways to benefit from leverage:
- You need less money to open an investment of a certain size.
- You can benefit more intensely from a small price swing.
Do you want to know more about trading with leverage? In this article we explain how investing with leverage works:
When trading CFDs, you can speculate on rises and falls in the market. You have the option to open a short position when using CFDs. When you short sell, you get a positive result when the price drops. This makes the CFD an excellent option to take advantage of falling markets or bad news.
Do you want to know more about short selling? Read our extensive article on this topic:
It is fairly easy for the average investor to understand the prices of CFDs. The price of a CFD follows the price of the underlying security fairly accurately. When Coca-Cola shares increase, the CFD usually also increases in value.
In addition, CFDs offer the necessary additional functionalities that make trading extra attractive. When you use CFD’s you can easily place orders. With orders, you can automatically open or close investments at a certain price. You can read more about opening CFD positions in this article. In addition, there are even more benefits associated with trading in CFDs.
A major advantage of CFDs are the relative transaction costs. When you buy a share from a broker like DEGIRO, you pay a fixed commission of at least $2. At Plus500, no commissions are charged, and you only pay the spread.
With online CFD brokers, you usually only pay the spread. The spread is a fixed percentage of the value of the investment. This makes it possible to achieve a good result with your investments, even if you only deposit a small amount of money.
Do you want to know more about the exact cost of investing in CFDs? Read our article on this topic:
The extensive range of CFDs is a major advantage. With CFD brokers, you can trade in CFD’s on shares listed in different exotic regions. Besides shares, it is also possible to trade in currencies, commodities, options, ETF’s and cryptocurrencies. This extensive range of options, makes it easy for every trader to find the right product.
This makes CFD trading very flexible. With one account, you have instant access to all global markets. With your local bank, you often have to pay extra money to access international markets. CFDs are therefore very suitable for investors who are interested in more exotic investment products.
Do you want to know at which broker you benefit most from the benefits of trading in CFD’s? Have a look at our overview of the best CFD brokers:
Another advantage of trading in CFDs is that you have complete control over your losses. You can control your losses by using a stop loss. With a stop loss, your position is automatically closed at a certain loss.
Please note that for the ultimate protection you need to use a guaranteed stop loss. With a guaranteed stop loss, your position will always be closed at the value you indicate. For a guaranteed stop loss, you will pay additional transaction fees. Furthermore, it is good to know that you can never lose more money that you deposit into your investment account.
When you invest in options or futures, you will have to take the expiration date in mind. When a security expires, the position is normally automatically closed at a certain date. This is usually not the case with CFDs. This gives you more flexibility: with CFD’s you decide the duration of your investment.
Another great advantage of CFD trading is the fact that you can try the possibilities for free with a demo. Many traders lose money in the beginning because they have no idea what they are doing. By first practising with a demo you can discover whether trading CFD’s works for you.
Do you want to know where you can try CFD trading for free with a demo? Use the button below to directly compare the demo accounts of the different providers:
What are the disadvantages of CFDs?
Below we discuss the disadvantages of investing in CFDs.
Of course, there are also risks associated with leveraged trading. In practice, many consumers achieve a negative result with leveraged products. This is often because they take to many risks. It is important to remember that applying a high leverage accelerates the results. It is always important to maintain sufficient margin on your account. If you do not have sufficient funds on your account, you can lose your deposit by means of a margin call.
Another drawback of CFDs is the fact that you have to pay financing costs. After all, the broker contributes the biggest proportion of the value of the investment. Because you pay financing costs, CFDs are less suitable for long-term investments. It’s therefore better to use CFDs for investments with a time frame shorter than a year.
Another disadvantage of trading in CFDs is the fact that you also need to invest more time. When you buy shares and start a portfolio, you don’t have to pay much attention to them on a daily basis. However, when you start using CFDs, you are an active trader. It is therefore important to spend more time on your CFD trades.
It is even more important (and perhaps difficult) to keep a cool head when trading in CFDs. Because it is easy to open large investments, a higher degree of self-control is required. Many people go too far driven by greed and lose their entire deposit. Do you want to learn how you can control your emotions while trading CFDs? In this article we discuss how you can do this:
When you trade with leverage, you pay transaction fees over your entire investment. When you apply a leverage of 1:10, you also buy ten times as many shares. It is important to remember that you pay the spread over all the shares you buy.
Another drawback of CFDs is the fact that you can never trade in a real share with CFDs. You will never receive voting rights with a CFD, which means that you cannot participate in the decision-making within the company. When you really want to become the owner of a business, you have to buy the share yourself.
Do the benefits of CFDs outweigh the disadvantages?
CFDs defiantly have numerous advantages and disadvantages. For many people, the advantages outweigh the disadvantages. Thanks to the introduction of CFDs, it is possible for investors to trade with small amounts in shares and currencies.
However, it is important to remember that there are elevated risks associated with trading in CFDs. Therefore, practice enough with a free demo before making a first deposit. Are you convinced of the merits of CFD trading and do you want to try the possibilities? You can do this with a free & unlimited demo! You can also check out our full list of brokers.