Is the Stigma Around CFD Trading Justified?

by Adam on September 28, 2017

financial newsCFD stands for contract for difference, and CFD trading allows the trader to invest in an asset without ever owning it. They have garnered a stigma for a number of reasons, but mainly because they are viewed as riskier than standard market investments. America has actually banned CFD trading, which has helped to deepen the cautiousness around investing in them. Here are some considerations on CFD trading.

Leverage

One of the main factors which draws traders of different types to CFDs is the ability to leverage trades. Depending on the level of leverage chosen, a trader can control far more units of stock with far less money, meaning that their potential gains from each leveraged investment can be greatly magnified.

Unfortunately, leverage can be both a blessing and a curse, as it also has the ability to greatly magnify losses. This can lead to an instant wipe out of any given trader’s funds and portfolio, and has caused many successful traders to lose a significant amount (sometimes all) of their money. That being said, using leverage is a choice, and it could be argued that applying too much is an irresponsible and risky move in itself.

Stop Losses

Something which can help to counterbalance the risks of CFD trading is the ability to apply stop loss orders, which involve setting a price at which any given commodity will be automatically sold off if the market moves against the investor.

This, too, can have its limitations, but the fact that it is fully automatic means it can help to significantly reduce the chances of losing too much in a single trade.

ftse100The Trader

In essence, CFDs are not massively different from standard trading instruments, and much of their bad reputation is likely to stem from traders making bad/irresponsible investments. The application of a well-reasoned, researched strategy which takes into account and effectively deals with all the risks associated with CFD trading can make a huge difference in terms of becoming a successful CFD trader.

Whilst some may have had a bad experience with CFD trading, others have also made consistent profits through applying such a strategy, so having the right mentality and approach can make a world of difference.

Ultimately, the stigma attached to CFD trading is probably a little over the top, as they can be risky if traded irresponsibly, but the level of risk is decided by the trader. With this in mind, it is up to those trading CFDs to apply their own logic and strategy to make sure they do not blow their budget through overly risky investments.

 

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