Risks and Downsides of Investing in Contracts for Differences (CFDs)

Risks and Downsides of Investing in Contracts for Differences (CFDs)

Indeed, CFDs are very much in demand for traders who are looking for more ways to earn money from the financial markets.  And it’s true that contracts for differences are very rewarding to those who know how to use them efficiently. However, there’s also no denying that CFDs come with inherent risks and Charts and Analysis downsides that you can’t afford to ignore.  

In this article, we will focus on the things that make CFDs a little less attractive for some risk-averse investors and traders.  If you’re planning to invest in CFDs, take time and read this article first.

Huge Potential Losses

CFDs enable traders to get the chance of earning high amounts of money through the use of higher leverage.  But leverage is definitely a double-edged blade, which can cut both ways. As it balloons your potential gains off of an investment, it also magnifies the amount of losses you may have to suffer if the trade goes against you.

Keep in mind that leveraged positions rise and fall and that your whole deposit balance can be subject to a margin call.  If you’re trading with margined products, it’s very important to work with tight stop loss orders to protect your balance from being depleted or getting entirely wiped out.

No Real Ownership

There are traders that see CFDs as less robust investments since the contracts don’t offer any real ownership of an asset.  Basically, they are just contracts. If you buy one, you get no underlying ownership of anything more than a contract whose price is merely derived from the price of the underlying security.

A CFD doesn’t have any intrinsic value except its price that’s based on the current Market News and Charts market price.

Spread Fees

On the one hand, the traditional markets expose you to fees, costs, charges, commissions, and high capital requirements.  On the other, CFDs diminish your returns via spread payments.

The profits you get, if any, from small moves in the prices can be eaten away by the payments you give for the spreads on the entries and exits.  Paying the spread also slightly stunts the winning trades and raises the losses a bit over the underlying asset.

Broker credibility

The CFD market isn’t subject to the same regulation treatment as the other markets.  While this certainly offers some flexibility and benefits to CFD traders, this also means that the credibility of CFD brokers are more reliant on the reputation than life span and financial position.

Before you decide to finally open an account, you have to ensure to look into the broker’s background.  There are many excellent CFD brokers in the investing realm, but it’s still way better to do your research before seeking out the help of one.

Overtrading

Since CFDs offer large leverage, it is important to take extreme care when using it.   As we all know, excessive use of leverage may lead to catastrophic results most of which end with you being zero in capital or even in debt.

Landing with the realm of overtrading can easily be done when trading is cheap.  But when several positions go south, you might not even have time to bid farewell to your money.  And you wouldn’t like any of that.

Category Finance