CFD PRos and Cons

November 30, 2021 Tom Clark | Comments Off

CFD Pros

  1. High Leverage

A double-edged sword is how you would describe leverage. In this case, whatever the outcome will be amplified by leverage. An obvious boon is present when the trader is endowed with the choice of selecting a kind of leverage that suits him/her. A rigid risk management checklist must be adhered to at all costs and their leverage ratios are correctly set.

  • Market Access

There is bound to be a CFD matched with nearly any financial instrument. A CFD capable of trading natural gas or currency can be found if a trader wants it.

  • Short-selling

Rising and falling prices are two ways traders can profit on the CFDs. Imagine this situation: A trader looks at the analysis chart of a certain instrument he/she traded. The chart shows that if the instrument is shown to decrease in value in a period of time, a trader may choose to sell it to save their money. The sell price is dependent on the buy price on how a trader gets their money back; the trader gets the difference of that.

  • The barrier to entry is low

A minimum deposit prerequisite is something most CFD brokers do not have. In some cases, $100 is set as the deposit prerequisite for some brokers.

CFD Cons

  1. High Leverage

A lost trade is magnified by leverage. This is a blessing and a curse.

  • The Spread

A spread must be paid when opening a CFD trade. A spread is defined as the difference in price between the ask and bid of a financial instrument. Additionally, this is the broker’s service fee for placing your contract on the market against other buyers and sellers.

Lucky for the traders entering, the spreads and trading costs have been massively reduced due to the cutthroat competition between CFD brokers getting more clients. To illustrate, 1 pip could be a measly cost of 1 pip for a trader’s spread if he/she decides to trade Forex currency pairs like EUR/USD and/or GBP/USD.

  • Free Margin Following

A measly portion of a trader’s account has to be allocated as the margin for his/her trade.This is only applicable when using leverage to trade and chances are, a trader will almost always trade with leverage. If this is not done, then the broker will do this task without being told.

  • Costs to Finance

Financing costs are something to put at the back of the mind when trading CFDs. On a daily basis, brokers charge the trader financing costs. This is because the broker lends money to the trader for leveraged trades. As with the cost of seemingly innocent cheap impulsive bought items, the meager financing costs will add up over time.