The past year has been financially challenging for many people. As experts predict, lots of 2020 market trends will continue to be up to date in 2021. It means that various ways of making money via the Internet will not lose their relevance. In this article, you will learn about the main benefits of CFD trading online and what novice investors should consider.
CFD stands for Contracts for Difference. In simple words, these are transactions between a seller and a buyer to profit from the future difference between the opening and closing prices. You can trade contracts not only for stocks but also for currencies, products, and indices. Nevertheless, novice brokers should opt for the stock market where company shares show significant movements.
This type of trading has a number of undeniable advantages that make it accessible for almost everyone. The main thing is to understand the basic principles of work and be aware of the possible risks. Among the main pros of CFD trading are the following:
- Small start-up capital. To take part in such a trade, you do not need to have a lot of money; it is enough to have about $200 on your deposit. Also, you can start with small investments; there are no fixed restrictions here.
- Access to different exchanges. Since you do not own an asset itself but enter into a deal to change its price, you can trade anything and anywhere with one trading account. CFD brokers offer a wide variety of contracts.
- The opportunity to make money both on the rise in prices and on their fall. In whatever direction the cost of this or that asset moves, you can always profit from it.
- High leverage. It allows a depositor to get more potential returns with less capital. Thus, CFDs are great for small investors.
- Lack of trade requirements. Some markets claim a minimum amount of capital for daily trading or restrict daily transactions. The CFD market is not limited, and account holders can trade during the day as they see fit.
All this makes CFDs much more convenient, cheaper, and more straightforward than standard futures contracts or options transactions.
While the listed benefits may lead newbie investors to think that this market is simple, it is far from the case. There are also a number of disadvantages to consider beforehand:
- Weak regulation. Because the CFD market is still quite young, there are not enough strict regulations about it. You should choose your broker wisely and trust only reliable services.
- Risks. They have a lot to do with high leverage. While it allows you to make more money, it can also lead to more losses. Besides, any investor is forced to pay bid-ask spreads and hidden fees that a broker can impose on them.
- You don’t become a shareholder. When you buy a stock, it stays with you despite force majeure and the company’s possible closure. In the case of a CFD, your ownership of a deal depends on your broker. If you trust an unreliable representative, you may lose all your contracts.
CFDs are complex tools and carry a high risk of losing investments quickly. According to various estimates, about 70-90% of investors lose money when trading (all providers should warn users about it on their sites). Moreover, some parameters, such as margin, may change depending on the market trends. However, if you understand the basic features of CFDs, know about the risks and can afford to lose certain investments, this type of trading will definitely become a convenient way for you to make money.