Choosing a CFD broker
Understanding both the benefits and drawbacks that come with CFD brokers and trades help you analyse the opportunity more accurately. Only when you fully understand both sides of this opportunity, will you be able to make a decision that works for you.
Welcome to live4trading, which aims to provide a full overview of the pros and cons associated with CFD trades and show you how it can be both profitable, but also a cause for losing money.
The Pros of CFD Trading
The major benefit of CFD trading is the fact that there is better leverage compared to more traditional forex trade. With forex trading in a more traditional system, initiating a position for $5,000 means you will have to deposit $5,000 and risk it all.
Now, turn to CFD trading, and you will generally only be required to deposit a percentage of the exposure. For example, initiating at a position of $20,000 could mean only need to deposit about $666 from your side. This means less of a risk is involved in the trade, but you can still gain a large profit.
This is because the leverage is generally not coupled to a 1:1 ratio in a CFD trade. For most of the Forex pairs you might trade, such as GBP against USD, a 1:30 ratio applies. Main indices, including gold, generally tend to have a leverage ratio of 1:20. With smaller indices, the ratio may come down to about 1:10.
Another benefit is that with a CFD trade, you could be profiting from a falling share value. This is not possible with traditional trading. With a traditional scheme, investing money into a commodity that loses value after the contract initiation means you are at a loss.
Turn to CFD trade, and you can choose to either buy or sell a commodity or indices listed on the platform. When you choose to sell, it means you speculate the value will fall within a specific period of time; if it does, you gain profit, not a loss.
There are also no stamp duties applied to CFD trades in the UK. Buying actual assets to hold in your possession within the UK means you have to pay a stamp duty fee. This fee is usually charged at 0.5%. Some providers offer regulated UK CFD trading. you can find here the 2020 Best UK CFD Brokers Comparison.
No such fees are charged when you use CFD trades, as you never actually possess shares in a company. Instead, the trading opportunity works based on speculation within a specified timeframe. you can even trade CFDs on the CBOE Volatility Index as its underlying asset
The Cons of CFD Trading
The benefits of CFD trading seem inviting, but understand the losses that you can incur and what the risks associated with the activity might be.
While traditional trades come with a stamp duty fee, there are times where additional fees could be charged on a CFD trade as well. Even though no physical commodities or shares are owned, an overnight fee is often charged. Whether you will be paying this fee depends on the time at which your trade expires.