CFD trading vs investing (2024)

FAQs

CFD trading vs investing? ›

In traditional investment, investors buy the underlying assets outright and become the legal owners of them, giving them the right to dividends, voting rights, or interest payments. CFDs, in contrast, offer exposure to the price swings of the underlying asset without entailing ownership of it.

When you keep a long CFD position open overnight, you'll pay interest on the leverage you've used. So for long-term positions, investing can be more cost effective. CFDs are often popular with active traders who might only keep positions open for hours or days. Investors, on the other hand, are mostly more passive.

Some advantages of CFDs include access to the underlying asset at a lower cost than buying the asset outright, ease of execution, and the ability to go long or short. A disadvantage of CFDs is the immediate decrease of the investor's initial position, which is reduced by the size of the spread upon entering the CFD.

CFDs are attractive to day traders who can use leverage to trade assets that are more costly to buy and sell. CFDs can be quite risky due to low industry regulation, potential lack of liquidity, and the need to maintain an adequate margin due to leveraged losses.

IronFX CFD trading

While profits may not be guaranteed, always expect a certain amount of loss, even if you are a more confident and expert trader, as the market is volatile and risky. But risks come with rewards, and taking a certain amount of risk could be rewarding.

This requires constant vigilance of the market and price movements. As well as the use of effective risk management to safeguard funds. Some of the most popular risk management tools used in CFD trading are stop-loss and take-profit orders.

By failing to adopt certain risk management techniques and simply opening trades without protecting their trades with take-profit and stop-loss orders, they risk losing all their trading funds.

CFDs are illegal in the US because they are an over-the-counter (OTC) trading product. OTC trading products aren't listed on regulated exchanges like the New York Stock Exchange (NYSE), bypassing US regulatory bodies. However, US traders have alternatives such as forex, options and stocks.

If you buy a CFD in Apple Inc stock and the price rises, your broker will credit your account in line with the price move. If the price falls, you'll record a loss, and your broker will debit your account the appropriate amount of cash.

As previously mentioned, trading CFDs in the U.S. is illegal. This is because they are an over-the-counter investment product that can't be regulated by traditional financial institutions. But the good news is, trading CFDs in the United States is only illegal for citizens.

What are the disadvantages of CFD? ›

CFDs are illegal in the US and Hong Kong but in other countries, they can be traded under strict regulations. In such countries as Austria, Cyprus, France, and Australia, CFD trading is legal but certain regulations are in place to protect the parties involved.

A CFD contract is legally binding. If the market goes against you, the CFD provider: will ask you to pay extra money at short notice to keep your CFD position open (a 'margin call').

Yes, you can trade CFDs for a living but you will need a lot of risk capital and a good track record. I've been involved with CFD brokers for about 20 years and have seen all types of traders try and make a living from CFD trading.

It is as real as any form of traditional investing or trading but has some unique aspects that set it apart from other forms of investing or trading. One of the reasons for CFDs' appeal is that a contract for difference (CFD) allows you to trade a currency pair, a stock, an index, or a commodity without owning it.

And if you lose more than you have, you could be at risk of having a negative balance and owe more than you deposited. Responsible, regulated brokers will manage the liquidity conditions and margin requirements to ensure you get closed out of any trade that might lead to losing more than you have invested.

For this reason, CFDs are also more complex financial products, which can be higher risk trades than share trading. This is because, with CFDs, your profits and losses can far outweigh your initial outlay.

This type of longer-term investment is less concerned with short-term price movements and current events unless affecting the CFD trader's long-term view of the position. CFDs can be a good choice for specific traders, such as long-term investors.