CFD trading on platforms such as XTrade Europe can be risky if you don’t educate yourself in the correct methods of trading. Below we will discuss the pros and cons to CFD trading, and offer you tips on how to become a better trader.
Risks of CFD Trading
Risk is a given, just as with any trading within financial markets. If the market makes a move against the investor, their position’s value will decline. However, this is the risk that any trader takes when they participate in any traditional form of trading. An added risk comes from the fact that a CFD is a leveraged product, which increases the chance of incurring large losses significantly.
As CFDs are traded on a margin, the investor is able to access the entire contract value for just a small percentage of the cost, however when they make a loss or a profit, these are based on the entire contract value and not only the amount that has been paid in the initial margin. The result of this is that trading CFDs may result in a loss that far exceeds the initial deposit amount. CFD trading therefore requires the investor to have a strong “game plan” on CFD trading. By accessing tools such as XTrade Europe’s Academy, you can easily learn how to manage your CFD trading strategies.
Advantages of CFD Trading on Xtrade Europe
XTrade Europe and many other professional trading platforms should offer you (through their online tutorials and tips) a solid and clear advantage on how to conduct your trades.
Trading on a margin: As trading CFDs enables the trader to hold a greater value than they actually contribute, the investor is able to earn a greater return on their investment.
No need to buy the actual stock: The trader never actually purchases the underlying asset. As CFDs are just a contract between the broker and the trader which relates to the underlying asset’s value, the trader never needs to have access to the exchange on which they are trading.
No Stamp Duty: CFDs never require the trader to purchase any shares and so therefore stamp duty is never charged on trades.
Dividends are paid: If an investor holds a long CFD position on their chosen company when the time comes for the dividend to pay out, their account is credited to the amount of the dividend. CFDs mirror the underlying asset’s value and therefore the investor holding the CFD position receives the benefit of owning the actual stock itself.
Interest is paid: If the investor holds a short position CFD, interest is paid by the broker on that money. Had the trader sold the stock rather than purchasing a short CFD, they would have been able to make a profit from interest on the sale proceeds. However as that interest is not being earned, the broker credits the investors account to the value of the interest that they would have earned.
Traders can profit in a falling market: When trading CFDs an investor is able to make money even on shares which lose their value when they make a correct prediction about the movement of the market prices. While this can also be done with other financial instruments, it is especially simple with CFDs as the client has no need to purchase the actual shares before selling them.
Guaranteed Stop Loss Function: CFD trading is risky and the investor is susceptible to making a large loss should they fail to cover their options adequately. To limit and reduce the risk, CFD brokers offer a Guaranteed Stop Loss function which offers a guarantee to the trader that should their CFD reach a given amount of loss, they will close it automatically in order to ensure that no further loss is incurred.
After Hours Trading: Many brokers permit investors to buy CFDs after market closing hours which is very beneficial to those who prefer to trade after returning home from their full time job.
Range of assets: There are plenty of different assets to choose from when trading CFDs. All of the major stocks are listed, as are foreign currencies, sectors, commodities and major indexes. This allows the trader to create a diverse portfolio of CFD investments.
No exercise date: In contrast to options, CFDs have no exercise date. While options generally have a lifespan of just one month, CFDs can last infinitely until the investor chooses to close the contract out.
Before you begin, take all of what I have written into context and remember that you can always check the viability of the CFD you are interested in, by researching online news. When trading within the CFD markets, you can easily look back on your history, available to you from your profile. Just like traders that work through XTrade Europe, you should always keep an eye on your history to ensure safer decisions in the future.