Pros and cons of CFD trading
CFD trading is quite different from traditional trading at some points; but what are these differences exactly? In this article we will discuss the advantages and disadvantages of CFD trading, so you can decide for yourself whether or not you like this modern way of trading.
Advantages of CFD trading
- The opportunity to trade with a leverage allows traders to make large profits with little money.
- CFDs are very flexible; you can customize features like a stop loss and a take profit at any time, allowing you to determine both the potential profit and the potential loss.
- When trading CFDs you can benefit from both rising and falling markets by respectively going long or going short.
- CFD trading is cheap, even if you trade with small amounts: transaction costs are very low and depend completely on the size of the order.
- If you are going to trade with CFDs you can choose from a wide variety of instruments from different countries, including stocks, indices, commodities, and Forex.
- CFDs have no expiration date so you can hold them as long as you want.
Disadvantages of CFD trading
- A high leverage brings with it high risks, especially when putting a large part of your capital into one single trade.
- CFD trading is mainly suitable for trades of less than one year. Because of the increasing transactions costs over time, investing in CFDs in the long run is less profitable.
- CFD trading may require some more time. The potential profits however are much higher.
- Because it is very easy to trade with large sums of money, a higher degree of self-control is required. A lot of people are driven by greed which makes them take too much risk and eventually losing their entire investment.
Do the advantages outweigh the disadvantages?
We can confidently say that CFD trading entails quite some advantages and disadvantages. It should be clear however, that for most people the pros outweigh the cons. The introduction of CFDs made it possible for novice traders to trade with little money in shares, commodities, currencies, and more.