What you need to be aware of when trading CFDs

The first thing a potential trader of CFDs should think of is whether these instruments are the appropriate ones to focus when trading online. Even though CFDs represent an alternative to traditional markets, trading CFDs comes with certain risks that traders need to review beforehand. CFDs are complex financial products and it is not only a profit opportunity, but also a danger of losing capital.

Leverage

Leverage can be both beneficial and dangerous for your investment. Margin trading means your profits have the potential to be magnified, yet it is important to note that losses can also be magnified. Therefore, it is crucial to apply appropriate money-management techniques. While few percentage points in a favourable direction can yield a substantial return, a similar movement against your trade can diminish your trading capital. So, getting the right balance of leverage is the trick to make leverage work. Taking unnecessary risks exposes you to significant losses. A steady approach with trading CFDs can significantly minimize the impact of leverage when trades inevitably go wrong and reduce the risk of trading with leverage.

Trading costs

When trading CFDs there are costs traders need to be aware of. The most common type of cost on CFDs is the spread which is once-off when opening a trade. Additionally, a CFD broker may have overnight financing charges. This is a financing rate for holding open position overnight. Also, be careful when choosing a CFD broker as some might charge commissions, separate from spreads. Make sure you read terms and conditions for a clear preview on the costs before starting trading online.

No ownership

Trading CFDs means trading on the rising or falling values of a financial instruments such as shares, indices, commodities, currencies and more. Yet, the trader does not buy the asset in this case. When buying a share, for example, it delivers a periodic profit. However, trading CFDs highlights solely the current market price and its movement.

As CFDs are complex financial instruments, traders should be considering the disadvantages too. Despite their flexibility and availability, risks are also involved when trading online. CFDs are instruments traders and investors like to have in their portfolios, but it might not be the right trading instrument for every type of trader.