Advantages of CFDs
CFDs tend to assure a certain level of leverage compared to the traditional trading. The leverage available in the CFD trading market is subject to legal regulations as a lower margin results to less capital for the investor and trader leading to low profits. A good 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 doesn’t own the underlying asset, he can be shorted at any given point in time during the trade.
One major feature of CFDs also include, 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 the level of risk attached to the underlying assets and the fixed set of spreads set over the course of the contract.
In a CFD contract, brokers are allowed to 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 isn’t 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 it is necessary that the broker’s account is 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 are able to hedge against the fall in value of a stock.
On another hand, the CFDs gives a better attractive market alternative to the traditional stock exchange and traditional markets. They also present possible pitfalls as having to continually pay for the spread on entries eliminates the possibility of a gain from little and small transactions.