Advantages of CFDs
CFDs tend to assure a certain level of leverage compared to traditional trading. The leverage available in the CFD trading market is subject to legal regulations as a lower margin results in less capital for the investor and trader, leading to low profits. A sound leverage system can be used to magnify losses.
Also, CFD brokers have access to global markets, and they can move from one platform to another, offering a wide range of products. In a CFD contract, there is no possibility of shorting or borrowing stock as the trader is only allowed to lend an instrument before selling or meeting the margin requirements. As the broker does not own the underlying asset, he can be shorted at any given point in time during the trade.
One major feature of CFDs also includes offering many similar orders and be guaranteed of a fee charged against recouping the costs. Dealers make money when the trader pays these costs and do not charge any other fee of any kind asides this. The profit/loss can be small or large, depending on the level of risk attached to the underlying assets and the fixed set of spreads set throughout the contract.
In a CFD contract, brokers can offer index, stock, currency, treasury and sector CFDs as an alternative to exchanges. The general stock market requires that there should be a minimum amount of capital available to be traded per day within some high net worth accounts. The CFD market is not bound by these restrictions, and all account numbers can trade freely as they deem it fit.
Disadvantages of CFDs
In the CFD market, the lack of a stringent regulation is not a welcome idea as the trader’s credibility is judged on his reputation, financial position and longevity instead of a government standing or liquidity. There are successful CFD brokers, but the broker’s account must be investigated before opening an account. Also, CFD trading is fast becoming increasingly used, and this calls for closer maintenance and monitoring so that the risks and margins can hedge against the fall in the value of a stock.
On another hand, the CFDs give a better attractive market alternative to the traditional stock exchange and traditional markets. They also present possible pitfalls as having to pay for the spread on entries continually eliminates the possibility of a gain from little and small transactions.