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There are numerous reasons that explain the popularity of CFDs. One of the most important factors is the fact that CFD trading can be realized with relatively little capital. Since only a margin needs to be deposited when buying a CFD, even small investors can profit from the price development of the underlying instrument.
Another point in favour of trading CFDs is the fact that transaction costs are usually very low and that full transparency in pricing is given at all times.
A large number of available underlying instruments is also a plus point, as is the fact that every private investor can act quickly and easily on the global markets.
Trading CFDs is possible with a small capital investment
Since CFDs are traded over the counter, you are not bound to the trading hours of the stock exchanges and can place your order around the clock. Nowadays, very high standards also apply to off-exchange trading, and you also generally trade more favorably than in stock exchange trading.
Overall, trading CFDs is cheaper than, for example, shares or other leveraged products such as warrants and certificates.
Despite the many facts that speak for CFD trading, you should always be aware that these are highly speculative financial instruments and that the leverage responsible for disproportionately high profits can just as quickly turn in the other direction and the possible losses can also be disproportionately high. However, you can limit your losses by setting stops and thus manage the risk of loss at any time.
Advantages at a glance:
- Trading with low capital investment possible
- Large numbers of underlyings
- Low transaction costs
- Flexible trading hours
- Transparency in pricing
- Large profits can be realized through leverage effect
- Possibility to bet on rising and falling prices
If you are looking for an investment opportunity with high return potential, there are several options available. Shares and certificates are often presented as very good alternatives. This is reason enough to take a closer look at CFD trading compared to shares and certificates. In the following table you will find all important information:
|Return potential||very high due to the use of levers||significantly lower, because only the normal increase in value is shown||only leveraged certificates achieve a similarly high yield potential as CFDs|
|Profit from falling prices||Yes||No||Yes|
|return even with falling prices?||Spread (low) Account management|
(often free of charge) s
Transaction costs of the broker Stock exchange fee
|Premium Transaction fee|
|Design||simple||quick to understand simple||complicated, many special products|
|short- and medium-term trading||very well|
|only suitable in individual cases||depending on the term|
|long-term trading||less suitable||very suitable||depending on certificate|
Who is CFD trading suitable for?
There are different types of investors, all of whom want to achieve a good return, but they differ in how they implement and plan an investment strategy. The following chart illustrates the differences between the three classic investor types.
TYPE A – RISK-AVERSE INVESTOR
These investor types are always looking for investment opportunities with the highest possible security. In return, they are prepared to accept a significantly lower return. The investment horizon of these people is very long-term.
TYPE B – OPPORTUNITY-ORIENTED INVESTORS
They are always looking for a good balance between return and security. They rarely risk total losses in order to take advantage of great return opportunities. Nevertheless, they also use riskier investments to increase their total return.
TYPE C – RISK-AVERSE INVESTORS
Investors with an affinity for risk subordinate everything else to the goal of the highest possible return. High risks of loss are taken in order to increase their own investment profits. Furthermore, risk-averse investors are quite open to short- and medium-term investments.
Both chance-oriented and risk affine investors can have their fun with CFD trading. The risk of a loss is indeed given, but trading with any instrument is about gaining more than losing. If the bottom line of all positions is a profit at the end, the investment was successful. So if you are willing to accept a certain amount of risk for a high return, are not critical of short-term investments and want to take advantage of great return opportunities, then CFD trading is the right choice for you.
In addition, more and more brokers are waiving the obligation to make additional contributions, the once biggest argument of the critics that one can lose more than the deposit is thus off the table.
A CFD Trader should bring these conditions with him
If you would like to enter CFD trading, you should be able to use at least a small capital stock beforehand. For beginners, sums starting at 1,500 euros are sufficient, because due to the levers, a respectable return can be achieved.
You should also think about your risk management and determine the maximum loss per trade. You will then base your investment amounts and security deposits on this mark.
Of course you also need a suitable CFD broker, whose interface you know better.
Under certain circumstances, it may therefore make sense to open a free demo account before the right start and familiarize yourself with the operation. In this way, trades can be carried out more easily later and you don’t have to search for important limit settings first.
THE MOST IMPORTANT REQUIREMENTS TO START:
- Functioning risk management
- Capital stock of at least EUR 1,500
- Powerful CFD broker
- Familiar user interface (possibly use demo account)
WHICH INVESTMENT FORM HAS MORE TO OFFER?
For years, equities have been the most popular form of investment for traders around the world. However, many innovative trading products have now become established and are now far more popular than equities. CFDs in particular are attracting more and more investors and in many cases are ahead of shares. We make the comparison and show you the advantages of CFDs over shares and where the disadvantages of contracts for difference lie.
SHARES AND CFDS – WHERE ARE THE DIFFERENCES?
In order to be able to draw a comparison between shares and CFDs, the question must first be clarified what these forms of investment are actually about.
Shares are securities which are shares in the equity of a public limited company. When shares are traded on a stock exchange, the corresponding prices depend on supply and demand. Anyone who buys one or more shares thus receives different rights.
These include, for example, the right to payment of dividends, the right to a share of the company’s share capital and also the right to liquidation proceeds if the company files for bankruptcy. Anyone who buys shares does so solely in anticipation of rising share prices.
When trading CFDs, you don’t own the underlying assets – you are just betting on the price development.
If, on the other hand, you buy shares CFDs or any other CFDs, you do not receive any rights associated with an actual purchase of a security. CFDs can be traded on a variety of underlying assets, such as foreign exchange, commodities, bonds or ETFs.
CFDs have a clear advantage over shares – those who trade contracts for difference usually only have to spend a fraction of the capital that would be needed to buy shares. Thus, trading CFDs is accessible to a wider range of investors, and even those who do not have a large budget can make high profits with CFD trading because the leverage allows large sums of money to be moved even with small capital and these sums can be secured by proper risk management.
Moreover, CFD trading offers the possibility of mobile management. There are numerous apps that allow you to open, monitor or close your positions on the go.
CFDs are also simply structured and transparent in pricing. The price trend of the underlying asset is reproduced one to one and no other factors are involved.
An advantage of CFDs is the fact that you can bet on both rising and falling prices and thus have the opportunity to profit from every market development.
Other advantages of CFDs are short selling, the risk diversification mentioned above and the mitigated currency risk. If one acts beyond the German borders, one is subject to the full currency risk with a direct investment. Losses can occur due to the usual currency fluctuations, although the share value remains constant. With a CFD only a weakened risk remains, which results from the conversion of the profit or loss from the difference between the entry and exit price into the own trading account currency. CFDs are therefore an attractive alternative to stock trading, not only for small investors.
FOR WHOM ARE SHARES BETTER SUITED THAN CFDS?
Although there are many advantages to trading CFDs, trading with contracts for difference is not suitable for every type of trader. CFDs are highly speculative financial products and trading them involves a high risk of loss. CFDs are highly speculative financial products and trading them involves a high risk of loss.
Anyone who wants to hold CFD positions for months will quickly notice that the associated financing costs can eat up a large part of the profit. For short and medium-term investment horizons, the financing costs are not very significant, but over time, the fees add up and may have a negative effect on the return. Therefore, if you attach great importance to security and want to invest for the long term, equities are generally better suited to you.
CFDs vs. certificates
WHICH SYSTEM OFFERS THE MOST ADVANTAGES?
Certificates, like CFDs, are among the most popular financial products. Both forms of investment have some similarities. However, on closer inspection, differences also emerge that distinguish each product. In the following you will learn which of the two instruments performs better in a direct comparison.
DIFFERENCES IN PRICING
Anyone who compares contracts for difference with certificates will quickly see that CFDs are characterised by simple and transparent pricing. The value of the underlying instrument is replicated 1:1 for contracts for difference. With certificates, on the other hand, different factors can influence the value of a certificate and so CFDs are far more suitable for inexperienced traders in particular due to their uncomplicated structure.
CONDITIONS FOR PROFITS
Furthermore, in many cases certain conditions are attached to certificates and only when these conditions are met can you make a profit with the certificate. CFDs also have an advantage here: when trading in contracts for difference, the price either rises or falls – and these are the only conditions that determine whether you make a profit or lose.
There is also a so-called knockout barrier for leverage certificates. If the underlying touches this barrier, the certificate expires worthless. With CFDs, a position is only closed when the amount of margin is no longer sufficient to meet a certain margin obligation.
AMOUNT OF THE TRADING FEES
Contracts for Difference can be traded in comparison to certificates with small numbers, which results in lower trading fees.
Another advantage of CFDs is that most CFD types have no limited maturity. You are therefore free to decide how long you wish to hold your positions.
AMOUNT OF THE TRANSACTION COSTS
Overall, the purchase of CFDs is cheaper than the purchase of Certificates because the transaction costs are lower in most cases.
Most certificate variations are also not suitable for day trading and are therefore more suitable for medium to long-term investors. Contracts for Difference, on the other hand, are not suitable for long-term investments, because in this case financing costs are incurred for each long position held overnight. Depending on the duration and the underlying instrument, these costs can make up a large part of the trading costs and can also significantly reduce your profits.
Everyone can decide individually which form of investment they prefer, but generally speaking, CFDs have more advantages than certificates and other comparable leveraged products.
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