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CFD Advantages

Advantages when trading the sharemarket with CFD's:

  • No Stamp Duty on CFDs (for UK and Australian Traders)
  • No or little Commission – some CFD brokers don’t charge commissions while others would charge a small amount.
  • Go Short! As a CFD trader you can choose to benefit from market downturns (as well as the usual long trades)
  • Leveraged, Margin Trading – You don’t have to fully fund the value of your trade since CFD dealers offer leveraged, margin trading which allows you to put in 5 to 10 percent of your equity in the trade.
  • Control Your Risk using Stop Losses, Guaranteed Stop Losses and Limit Orders.
  • Access to Many Global Markets with a Single CFD Trading account.

Risks of Trading CFDs:

If you’re looking into trading CFD and have been doing your due diligence before playing with fire, you would definitely have heard from someone that CFD’s are risky. Super risky. And they aren’t too far from the truth. They are. So you need to be super careful when you do start trading CFD’s. So why are CFD’s so risky?

  • They are leveraged trading instruments, and because of it is geared, means it’s a double edged sword. Both profits and losses are magnified as a result of the gearing.
  • No rights as you do not hold the underlying security, so you have no voting rights.
  • Interest and fees: If you plan to hold a position in the long term its going to cost you big time in fees and or interest.

Ways to control your level of risk with CFD’s

  • Trade CFD’s with a trading plan, complete with a stop loss mechanism.
  • If you are planning to hold the security in the long term, consider buying the actual security to avoid paying fees and interest
  • Before you even touch CFD’s, especially if you have not traded before, I recommend you to paper trade and get a demo account if possible. Do this for a few months. Be patient. Trading success is a long term thing. Greed and impatience can be dangerous while trading.
  • When you do get the nerve and the courage to finally trade, start small. Start with the smallest amount your dealer would allow.
  • I also recommend you keep a spreadsheet detailing your profits and losses, and with the spreadsheet, keep a journal about your trade before, during and after the actual trade.
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