Advantages and Disadvantage of Investing in Contracts for Differences

A contract for difference (CFD) provides European traders a chance to gain some profits from price movements without actually owning the underlying asset. It’s fairly easy to calculate just by the asset’s movement between trade entry and exit, computing only the price change. Here are some of the most important advantages and disadvantages of investing in contracts for differences.

Advantages of CFDs

Higher Amount of Leverage

CFDs trading offers higher levels of leverage than traditional forms of trading. The standard amount of leverage in the CFD market is subject to regulation, having once been as low as a 2 percent margin though it is now limited in a range of 3 percent that could go up to 50 percent.

When you have a lower margin requirement, you will have less capital outlay, thus greater potential returns. Just keep in mind that higher leverage also means higher risks of losses.

Market Access in a Single Platform

Most CFD brokers provide products in all major markets, enabling you to have a round-the-clock access.

No Shorting Rules or Borrowing Stock

There are some markets that forbid shorting, or require the trader to borrow the instrument before selling short or have different margin requirements for short and long positions. CFD instruments can be shorted at any time without paying borrowing costs since he or she doesn’t own the underlying asset.

Professional Execution minus the Fees

CFD brokers provide many of the same order types as traditional brokers, such as stops, limits, contingent orders (like ‘one cancels the other’ and ‘if done’).

There are brokers that offer guaranteed stops that charge a fee for the service recoup costs in another way. Brokers make money when the trader pays for the spread. On top of that, most of them do not charge commissions or fees of any kind.

In order to buy, the trader must pay the ask price. To sell or short, the trader has to pay the bid price. The spread can be big or small depending on the volatility of the underlying asset, although fixed spreads are usually available.

No Requirements for Day trading

Some markets require minimum amounts of capital to day trade, while some place limits on the amount of day trades that can be done within certain accounts. Luckily, the CFD market is not bound by these limitations and all account holders can perform day trading if they want to.

Trading Opportunities

Most brokers typically offer stock, index, treasury, currency, sector, and commodity CFDs so speculators in different financial vehicles can trade CFDs as an alternative to exchanges.

Disadvantages

Paying the Spread

Having to pay the spreads on the entries and exits wipes the chance to gain profits from small moves. The spread also diminishes winning trades by small amount compared to the underlying security and will increase losses by a small amount.

Weak Regulations

Bear in mind that the CFD industry is not highly regulated and the broker’s credibility is based on reputation and financial position instead liquidity or government standing. This is why it is extremely important to research the broker’s background before investing any money. You can get Wibest Broker Forex News about Wibest Top Brokers here