CFD trading benefits
Whether you are already a somewhat experienced trader or you are just about to enter the industry for the first time, you absolutely need to know the crucial differences between regular and CFD trading.
And that is not just for your general information, but because I think that knowing the differences will actually influence your trading behavior as a whole. From my perspective, CFD trading is superior to the regular trading markets for several reasons.
1. Margined investments
The margin is the actual amount of money you are required to invest in order to control a high-value position. So, if you aim at controlling a $50,000 asset, the margin you are required to invest is between 5% and 25% of the asset’s value, depending on the broker.
What this means is that, instead of paying the full price of $50,000 to own control the asset, now you only pay a portion of that with the same effects, except owning it. But the return rates will be based on the asset’s full value anyway, so this is a win-win situation for you.
Smaller investments is the magic notion here.
2. The leverage
The leverage is the act of using the margin to increase your future gains. The leverage is the Holy Grail of CFD trading and for good reasons. Compared to regular trading methods where you will rarely have the opportunity to get a 200% return rate, leverage can boost those numbers up to 600%-700%, sometimes even more.
This is huge by any standards, especially when considering the low investments you are required with in the first place.
3. The market can be explosive
As long as you use your cards right, playing off the market’s volatility is incredibly rewarding. Imagine an asset spiraling out of control shortly after you have placed a bid. Imagine it spiking to abrupt heights within hours of putting some massive leverage on it.
We are talking about swift, heavy return rates, boosting your capital in no time. It is for this reason that the CFD trading market is so appealing to so many traders, advanced and beginners alike.
4. Few or no broker commissions
Compared to regular trading, most CFD brokers do not take any commissions with CFD trading. Instead, they will get their pay from spread manipulation, without any additional leverages placed onto the trader.
This is one of the many benefits of CFD trading that continue to draw people towards this type of activity, instead of the more traditional methods.
5. Easier to understand and execute
One of the key differences here is that CFDs function the same as binary options in a sense. You only have 2 possible outcomes on which to bid. The major difference is that, contrary to binary options, where you will have to name a specific value as a reference point, with CFDs you only need to point a direction of movement for the asset.
If you nail it, it’s pay-day. If not, it’s not. This makes up for an easy to understand system, where all you have to do is understand the basics and you are good to go.
These are only the most important 5 benefits of CFD trading, but the list is not exhaustive. There are others along these lines that you may discover as you go along.
CFD trading risks
As you may have already guessed it, not all is fun and games in the trading industry. Sometimes things can get an ugly turn and it is up to you to use your knowledge and experience to either avoid the outcome or bring yourself right back on the track in no time.
What I am trying to say here is that, in essence, the risks of CFD trading are completely avoidable, unless you are completely ignorant about this aspect altogether. With this out of the way, here are some of the most important risks you need to pay attention to:
1. The leverage and its downside – The leverage is known to come with both great return rates and awful losses. This is how the CFD leverage works and you should be very careful how you use it.
2. Short-term trades are a bit expensive – This is because of the spread costs. Brokers will get paid a portion of your spread for both opening and closing a position. This makes shot-term trades not worth the investment, unless the return rate is quite substantial.
3. Long-term trades are also a bit more expensive – This is due to the fact that, with CFD trading, you have to pay overnight fees for long-term commitments. Obviously, this is only a partial downside, because, in most cases, the investments are worth it.
4. The market’s volatility – This can work both ways. Which means that, aside from huge opportunities, you will also face huge risks, in case the market doesn’t behave the way you thought it would.
There may be other smaller risks, but I wanted to focus on the more important ones. But, an important aspect, can you avoid or, at least, minimize the risks? Sure you can. You can do that by:
- Carefully analyzing the market before jumping into the stream
- Only focus on safe deals, even if they are not hugely profitable
- Manage your capital wisely and avoid large investments
- Maintain your focus and never let your guard down
These countermeasures should be enough to set you on the right track. After all, the risks and benefits of CFD trading are directly linked to your profile as a trader. The more knowledgeable and consistent you are, the higher the likelihood for you to increase the benefits and minimize the risks.
Play it smart and you will be making smart money!