CFD trading, like any other derivative form of online trading has a unique set of features that set it apart. But the main attractive feature about it is arguably leverage.
Many traders are lured in with the prospect of making immense gains in profit out of relatively tiny investments but are not well informed as to the extent of the risk posed by leveraging a position and how it can backfire on your finances monumentally.
Is CFD trading really that risky?
Leveraging aside, CFD trading should be considered with the usual concerns associated with other online trading derivatives. In very simple terms, CFD trading can typically be tamed by seasoned veteran traders who are highly skilled and intuitive about the market as well as possess a solid amount of capital to cushion most financial blows.
All CFD trades are executed on a marginal basis, meaning you do not need to expose the full value of an asset to place a trade on it. You can deal with something as small as 10% of it. Not owning an entire asset also clears you of any stamp duty you would have to pay.
Let us talk more about leverage
The main instruments available for CFD trading are shares, indices, commodities, foreign exchange and treasuries. To make a profit out of even the slightest movement of the quoted price, the key tool you need to use is leverage.
As mentioned earlier, a key feature of CFD trading is the ability to trade on margin. The prime advantage of trading on margin is that CFD traders have easier access to the market since there is not a particularly large deposit required and positions are open for as low 10% or even 5%. What you are also exposed to as a trader is the movement of the price in direct proportion to the full value of the trading position.
So even if it is only a small unit you have claimed you are still liable to receive the profit or loss of the entire position. For instance, trading at a margin of 5% will leverage your position 20 times over, so if your initial deposit is $5000, you are exposed to a position worth $100,000.
Remember the tiniest fluctuation one way or the other can yield such a result. Therefore, if you profit from the position, all will be well, but a loss could land you in serious financial trouble.
So clearly, CFD trading is not for the faint hearted. It requires a thoroughly comprehensive knowledge of the market to make an optimistic bet. While the nuts and bolts of leverage can be a little overwhelming at first, knowing them inside out is crucial before committing to a trade in CFDs.
It is only natural for a trader to decide that the stakes are simply too high to make any kind of participation in the market. All one has to really do here is dial it down on the investments. Some brokers do offer mini contracts for those traders who cannot afford to lose more than they bargained for.
While it is tricky enough to try and take an educated guess at which general direction the market will move in, imagine having to worry about every minor little fluctuation that could result in triumph or a spectacular loss.
Conclusion – CFD Trading
The bottom line is there nothing inherently amiss with CFD trading. It is simply the prowess with which traders utilize it. For trading form that yields such magnified responses in either direction, you need to be on top of your game assessing the risks and determining the sums you dare invest in it