CFD Trading: Pros and Cons

In the stock market, some investors may choose derivatives to seek greater performance. This is the case with the Contract For Difference (CFD).

When we invest in the stock market, we choose securities for their performance potential. It can be the income paid out in the form of dividends or the potential for capital appreciation in the short and medium term. The most experienced investors, such as traders, can use support that allows them to multiply their gains. CFDs (Contract For Difference) are one solution in their range of options. These are derivative products that make it possible to bet on the rise or fall of a financial security called the underlying. The latter can be a share, a stock market index, a fund, etc.).

With CFD trading, the goal is to make money by touching the difference between the price of the underlying between the purchase and resale of the CFD. This difference is multiplied by a factor called leverage.

Good to know :

CFD trading is intended for people who perform frequent buy-sell transactions (eg intraday).

The benefits of CFD trading

The main interest in CFD trading is to take advantage of a multiplier coefficient to increase your earnings by two or five. Some trading platforms even offer much more (when others limit this leverage) by providing stop-loss. This is called limited risk CFDs. The choice of broker is therefore important before investing (discover our comparator on the best trading platforms).

CFDs are also interesting because they allow you to invest (up or down) in many financial assets such as stocks, stock indices, commodities, currencies and cryptocurrencies.

In addition, CFDs do not have an expiration date, which allows them to be held indefinitely. Unlike traditional shares, CFDs can be traded at any time and outside the opening hours of the financial markets.

Risks associated with CFD trading

Leverage is the biggest risk associated with CFD trading. In fact, it multiplies the risk of loss. It is therefore necessary to be vigilant with margin calls. In the event of a potential loss, your broker may liquidate your position out of the available funds in your account if the available funds are not sufficient. The consequence will then be a definitive loss that cannot be compensated by a market restructuring that is more favorable to your original investment.

Since CFDs are not securities listed on official markets, their marketing is not based on strict rules. The rules for their operation or the fees charged therefore depend on the trading platform.

To protect savers, the European Securities and Markets Authority (ESMA), the European financial policeman, has taken several measures to limit losses, in particular by providing measures aimed at reducing the leverage effect or by limiting the risk of all deposits.

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