The Good and the Bad of CFDs

by Darwin on February 24, 2016

Screen Shot 2016-02-24 at 10.25.12 PMCFDs, which are betting on margins, have quite a few benefits, which have helped them to grow in popularity among many types of traders in recent years. Of course, even though they have a substantial number of benefits, they do have some risks associated with them as well. Let’s look at the pros first.

The Pros of CFDs

Since you are betting on margins rather than actually buying and holding assets, you hold more value than you actually spend on the trade. This means that as a trader, you have the capability to earn more for your ROI since you aren’t putting out a lot of money on the asset. The CFD is simply a contract between the trader and the broker.

In addition, you could get dividends in some cases. If you have a long CFD position in a company when they are paying out their dividends, you will be provided part of the dividend as well. Even though you do not own the asset or the stock, it still provides you with the same benefits as if you did, and fortunately, that included dividends. If you have a short CFD, you could actually earn interest.

You can short shares as well. If you are able to predict the movement of price, it may even be possible to make money on assets that lose value. Go through the broker to get a guaranteed stop loss, and you can reduce the amount of risk and loss that you could occur when trading.

Many of the companies that offer CFD trading will allow the traders to make their purchases after hours. Since many people who are trading in CFDs are doing so part time and have other fulltime jobs, this can be very helpful.

Finally, traders will have a large number of choices when it comes to CFDs. They can choose CFDs for stocks, commodities, major indexes, sectors, and currencies. This makes it much easier for traders to find several different areas in which they can trade, so they can increase the diversity of their portfolio.

The Cons of CFDs

While there are certainly a number of benefits associated with CFDs, there are some cons to consider as well. Since the contracts are traded on margin, the trader needs to pay interest on the margin provided by the broker. Since there is interest, many people choose to use only short-term CFDs.

Even though CFDs have the same value as their underlying assets, they do not allow the trader to have any voting rights in the company. This makes sense though, as you don’t actually own any part of the assets.

Since only a percentage of the investment is required when setting up the contract, it is possible for the trader to lose a substantial amount of money if the asset doesn’t move in their direction.

If you are considering CFDs, make sure you understand all of the pros and cons and how to best invest before you make your first trade.

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