The immense growth of traders’ interest in CFDs drives more and more players into this trading sector. But is online CFD trading really worth investing in today? Isn’t it an over-advertised instrument made by brokers to earn on quick-profit seekers? Not at all. CFD definitely stands apart from the rest of the market, but it also lets traders earn big. However, deciding on whether to try this instrument or not is only up to you, so you have to weigh both benefits and risks to see the answer.
What Is CFD?
CFD (Contract for Difference) is an online financial instrument that lets you make profits by predicting asset price growth and drops within short periods. Correct predictions always win, and false ones always lose. The types of underlying assets that you can speculate on include stocks, commodities, Forex, industry sectors, treasuries, and indices.
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Benefits of CFD Trading
- No need to purchase real assets – opening a CFD position doesn’t require you to own the full underlying asset. You only have to invest the small difference between the opening and closing price of a position upon opening.
- The profits are usually leveraged – most CFD trading platforms don’t allow non-leveraged trading, which means that your profits will always be multiplied and based on the full value of an underlying asset. It’s a good way to generate large profits if you know what to do.
- You can go short and long – this means that you can bet on both positive and negative price movements. The only rule is to make the right prediction and close the position in time.
- You can mirror trade – the CFD market depends on the underlying asset price movements. For example, if you are an experienced stock trader, you can apply all your knowledge for trading stock CFDs and make leveraged profits.
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Obvious Risks and Disadvantages of CFD Trading
- The losses are usually leveraged – losing is the largest risk on the CFD market because the losses are based on the full asset value and can grow large if you don’t quit on time. Fortunately, trading platforms let you request stop-loss orders that will automatically cause your positions if the prices start soaring against you.
- Holding fees apply – you always have to pay to hold if you decide to keep your positions longer than the free period lasts. This can be a disservice and make you lose more than you will finally earn. Keep your positions for long periods only if the stakes are higher than the holding prices and your capital’s safety cushion.
- The spread automatically lowers your position – every time you open a position, you always have to pay the difference between the opening and closing price of an asset upon opening a CFD position.
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All this being said, you can now make a choice and test your first CFD trading strategy in a demo account. Your success heavily depends on your level of experience, ability to make correct predictions about market trends, and the strength to tame your nerves and follow strict strategies. This can be your next high-profit investment if you use it right.