CFDs (contracts for difference) now enjoy a huge popularity rise. This has been going on for some years and led to the appearance of brand new CFD brokers. These seem to appear every single month. CFDs are now seen as very valuable and are enjoyed by traders from all around the world, regardless of their personal experience level.
Very Easy To Start Trading
Most of the popularity increase came from the fact that CFDs are very easy to understand. You can easily start trading in just a few hours after you create an account with a broker. Then, after funding is verified, you choose what CFD trade to start.
Volatility And The Use Of Leverage
A huge reason why the CFDs are traded is that they can take advantage of market volatility. Then, for the traders, they are attractive because of the use of leverage. This is what allows you to make much more money when you are successful with a CFD trade. At the same time though, it also means that you are going to lose a lot more if the trade does not work out.
While leverage propelled the popularity of CFDs, it is also the downfall of everything. High leverage instantly means trading on margin. When you undergo margin trading, the broker is practically lending you money as the trade continues. This makes traders invest in some positions that they couldn’t have afforded in the first place.
CFDs are volatile. Price variations can easily appear even during a very short time frame. As you combine this with leverage, the trading setup can be very lucrative.
Medium Term Speculations
The popularity of CFDs is also high because of functional reasons. You can easily profit from medium-term speculations, especially when referring to commodities. If you are to normally be involved, the process is very expensive. Since individual assets are volatile, this can easily cover up for the CFD’s natural high-yield nature.
For instance, let’s say that a trader wants to invest in the oil market for 2 months. When using CFDs, the solution is much more cost-effective and tax-efficient. The trader can easily get involved in the market without having to invest the same money in owning the position.
CFDs are also popular because they instantly stand out as a dream investment opportunity. However, those that think this is the case are naïve and not correct. There are definitely high rewards that are possible but at the same time, risks are really high. Due to this, whenever you think about investing in CFDs, you need to be careful.
Proper CFD trading is all about the way in which you handle the investment you make. You need to build a proper investment strategy and then stick to it. If you do not do this and you do not have entry and exit points set up, you are setting yourself up to losing money. If you have any doubts, the best thing you can do is to simply not open a CFD position.