CFD trading has become the most popular method for trading financial instruments in the forex and Crypto market today. Many investors have been attracted to it due to the high leverage offered by the most popular CFD brokers for trading different pairs as CFDs.
While CFD trading has many advantages for the trader using them, it also has its inherent disadvantages too. This work has therefore examined the good and bad sides of CFD trading to help traders make their decisions on whether to choose or avoid them.
You will also learn from this work the different forms of CFD trading and the best brokers for CFD trading.
What is CFD trading?
CFD trading is a popular form of trading that involves entering into a contract with the broker to receive as returns the price difference in the purchased assets from your entry up to the exit point. The term CFD stands for ‘contract for difference’.
An important point to note about CFD trading is that there is no legal ownership of assets purchased and the owner will have to forgo his investment should the resulting price difference exceed his total capital.
Nonetheless, the high leverage offered by brokers in CFD trading can also be an added advantage to CFD trading for increasing their returns in cases when they make the correct predictions or when the market goes in their direction up to their exit point.
Types of CFD trading
There are two main types of CFD trading known Futures and Margin trading. We have explained these two below.
Futures: This type of CFD trading allows the trader to make long-term predictions about the market by going long or short using his desired leverage.
In futures, the trader bargains for the market to attain a given price in the succeeding days or months depending on when he chooses to end the contract. He places all his capital for betting on this position.
Margin trading: This second form of CFD trading is very similar to futures trading, however, the only difference is that the trader will have to set aside a given margin of his capital as the margin to sustain his future price predictions.
The margin could be 1-2% of his capital depending on the contract signed with the broker. Also, margin trading offers the trader more leverage for trading than futures.
Advantages of CFD trading
- High leverage is offered: The high leverage offered by brokers often served as an added advantage for traders to maximize their returns with small capital.
- Hedging: CFD trading allows the trader to back up his positions to sustain his initial position should the market go against him.
- Unlimited Trading: CFD trading allows the trader to either long or short market. This means there is no limit on the direction he can choose in the market.
- Suitable for traders with a small capital: CFD trading enables traders with small capital to take larger positions above their capitals and earn the same rewards as those with higher capital.
Disadvantages of CFD trading
- Lures traders to neglect risk management: Traders are often misled by the high leverage to neglect risk management practices
- Comes with high risk: The trader’s capital is staked and could be forfeited entirely in cases of strong market volatility.
- Lack of legal ownership for assets: There is no legal ownership of assets purchased. Hence, no claims to assets should the loss exceed one’s capital.
List of Best Ten CFD brokers for trading
- ATFX
- Hantec Markets
- eToro
- FXTM
- com
- Ava Trade
- Blackburn Markets
- Eightcap
- ActivTrades
- XTB