There is no dearth of reasons why CFD trading is touted as a better trading option than regular stocks. And, speaking about the advantages of trading CFDs – the first thing which comes to mind is the small margin benefit. Traders are required to invest only a small margin instead of the entire value of investment. For instance, if you are investing in 200 shares of a particular company and the current stock price is $1 then a traditional stock investor has to invest the entire $200 to set up a position. However, a CFD trader, on the other hand, will not be required to stump up more than just 10% or 20% of the total price. Needless to say, online CFD trading has attracted a large number of traders from across the globe.
Risks associated with Online CFD trading: What you should know
If you are also interested in trying your fortunes in CFD after considering your advantages then you should also weigh its risks without fail. Let us tell you from the very beginning that online CFD trading is not without its risks. And, as a trader willing to make your foray in the world of CFD trading you should prudently acquaint yourself with these risks as well.
So what exactly should you know about online cfd trading risks? Here are details.
Traders unequivocally admit that CFD trading has its own set of risks. A trader should know about these risks besides the advantages in a bid to judge suitability.
The low investment requirement (we have already mentioned about the same) acts as a double-edged sword. You can buy shares worth $100,000 with only $5000 cash in your account. However, the stock price would only need to drop by 50 cents and you will end up losing all your investment. The low cash deposit might as well tempt you to buy shares worth a huge amount in the hope of making equally huge profits. However, the chances of making huge losses with a single slip cannot be ruled out as well.
There is every chance of you losing more money than you can even imagine- blame it on the volatility of stock markets as well as the high leverage that can actually result in very fast altercation of your position as a trader. It is important to know that people who trade CFDs are generally full time traders who actually shell out enough time to monitor the market.
If the services of a CFD provider collapse, then your money might as well be used to meet liabilities along with the margin requirements. This is called counterparty risk. Make sure you are acquainting yourself with details of counterparty risks as well.
So, if you don’t have the required time to manage your investments it would be best for you to forget about CFD trading altogether. Since, it requires good investment management skills- newbie traders who are yet to master the tricks of the trade are advised to stay away from CFD trading.
Consider these factors
You have to know the market properly in order to monitor it on a regular basis.
Do you think you can deal with all the risks associated with CFD trading? You might as well require quite a bit of time in order to reach a decision but make sure you are not taking an action without weighing the pros and cons.