CFDs are becoming more popular by the day, and more investors are coming into the picture. Although the strategy is being opened to the public only through stages, all investors are trying to learn more about it. Contract for Differences makes for an agreement between you and your broker with obligations to be paid as the difference of prices between when you opened a position and when you closed it. CFDs can, in other words, be called a bet over the rise and fall of the prices.
If you buy certain CFDs for a few dollars, the broker will pay you a certain percentage of it when the price rises. And, on the other hand, if the price falls, you will need to pay the broker that percentage of the money. CFDs may seem just like stock trading, which is all about buying some stock and gaining or losing corresponding to the rise and fall of the price. Although that feature of CFDs and stock are similar, they are unique in their own ways. The Contract for Differences has a set of pros and cons that set them apart from any other type of trading.
The Pros of CFD Trading
· Trading of Short and Long Positions
Most traders like CFD for its ability to open both short and long positions. When the underlying assets witness a dip in value, you earn a profit from short positions. Overvalued stocks that are due for correction can be used at your advantage with these positions. It also provides you with more trading opportunities.
· Instant Execution of Orders
Opening and closing of positions happen almost instantly right after you give the orders. Traditional stocks could take a couple of days to settle if you are not in major cities or your markets are relatively less accessible. CFD gives you more trading opportunities even with instant access to your capital. You also offered the ability to react faster and better to the changing market conditions.
· Reasonable Commissions and Fees
You are less likely to be charged any fee for the opening and closing of positions. CFDs do not come with huge commissions either; they are much lower than in stocks.
· Trading with Leverage
A large position can be controlled using a small amount of capital when you are provided with the option to trade using leverage, and CFDs are offering that too. Leverage allows you to make better profits from small movements.
The Cons of CFD Trading
· Everything Could be Lost
Stocks rise after a sudden drop, and that is how the nature of it has always been. Your CFD position could just close out if it drops below a certain point. Make sure you have enough money with you to hold onto that position if the trade goes haywire.
· Overtrading is a Possibility
Most new traders tend to make the mistake of overtrading. The speed of the trade pushes many of these traders to take this drastic step. Traders who cannot control their emotions in the trade can mess it up by overtrading.
· Financing Fees
You will be charged with a financing fee if you keep a CFD position open over the weekend or even overnight. If you trade with open short positions or leverage, you will only be charged a small fee.