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Trading CFDs comes with many advantages, but there are risks too…

by , 14 January 2014

When it comes to trading contracts for difference (CFDs), there are many advantages. These include low trading costs, no expiry date and hedging your portfolio. But like anything, there are some risks too. And before you embark on trading CFDs, you need to be aware of these. So read on to uncover the disadvantages of trading CFDs…

Some of the advantages of trading CFDs also work against you if a trade doesn’t go your way, the research team at FSP Invest in The Ultimate Contracts for Difference Guide explain…

Despite gearing being an aspect of CFD trading that multiplies profits, it can also go against you. This is because gearing not only magnifies your profits, but also your losses. So, you need to bear in mind that this multiplier effect can work against you.

This is a risk-reward relationship: You take on higher risk in the hope of higher reward when you trade CFDs. But you must remember that this can also go the wrong way and leave you losing more than you had initially anticipated.

That’s why money and risk management is of crucial importance.

Stop losses are vital when you trade CFDs

It’s important you use stop losses.

By placing your stop loss at a point that protects the majority of your capital, you can cut your losses. Without the use of a stop loss, there’s a risk of very large losses if the price moves against your open position.

You also shouldn’t hold CFDs for the long-term. This is because of the costs involved, such as the daily funding cost to hold your CFD position. These will add up over time.

If you’re looking to hold a CFD for years, you may as well purchase the underlying asset.

And by buying CFDs, for instance, you still gain from dividend payments, but you receive no voting rights like an ordinary shareholder.

So there you have it, the risks of trading CFDs.

Trading CFDs comes with many advantages, but there are risks too…
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