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CFD Trading is Not Safe

by dollarwise
CFD Trading is Not Safe

Here’s why I think CFD trading is not safe. Contracts for difference or CFD’s are a leveraged way of trading on underlying shares, indices, currencies and commodities. You can buy if you think the underlying asset will rise or sell if you think it will drop. When you close out the position you pay the difference or are paid the difference between the buy and sell positions. The really dangerous thing with CFD trading is that you can heavily leverage your position. With just a few thousand dollars you can trade the equivalent of tens of thousands of dollars with the consequential gains or losses. The company’s offering these will tell you that you can make money on the way up and the way down. This is true. They will tell you that you can make lots more money than trading physical stocks. This too is true. That they can be used to easily hedge your physical portfolio. True again. However there are a few other truths you should know as well that might make you think twice about opening a CFD account.

Leverage Means Big Gains or Big Losses

No one ever wins all the time. The problem with CFD trading is that when you lose, you can lose big time. There are countless stories of people losing everything in a night. A correction can mean really big losses when you are highly leveraged. As long as movements are small, everything is generally fine. However, a few times a year there are large overnight movements that may lead your CFD provider to close heavily losing positions and so empty your accounts. This is bound to happen at some point and is a risk that is not worth the potential gain. I’d rather have real stocks. Yes, they lose value, but you only lose a portion but still own the stock. If the stock is good, it will rebound again. But when you lose out with CFD trading you end up with nothing, no stock to rebound. That’s why CFD trading is not safe.

Why You will Almost Always Lose Out When CFD Trading

Here’s why you will likely lose out with CFD trading. As humans we tend to cash in our winners early, but let our losses run in an attempt to win them back. This is how gambling works and CFD trading is gambling. We do this on the stock market too, but there we have a real slice of a real company that can return real value to us over time. In the panic of a big loss, people tend to become more risky and put everything on the line. Ofcourse, everything is what you lose. You’ve been warned. CFD trading is not safe. It’s characteristics are more like the TAB than the stock market.

It’s Time Consuming and Addictive.

CFD trading by nature requires a high level of engagement and can, like gambling, be addictive and stressful. If staring at a screen all day when you are meant to be doing something else sounds fun, by all means go ahead. CFD trading is not a set and forget it type of trade. With shares I often trade for long term gain, buy it, be aware and active, but you don’t sit and watch it every day. Not so with CFD trading. It can easily consume your life for the worst and is simply not worth it, even if you do manage to make money.

You own a contract, not a share of anything.

I like shares, you actually own a slice of a company and you share in its profits. But with CFD trading all you have is a contract with a company. That company could go bust, as did the likes of MF Global. If that happens, you may not even get paid out.

Overall CFD trading is not safe. Stick with physical shares and you will end up ahead with far less stress.  Leave CFD’s for very experienced traders. Yes your shares will go up and down, but if the company is good and you spread your investment over lots of good companies, you will certainly end up ahead in time. It’s not quite as sexy, it won’t make you a millionaire overnight, but it’s a whole lot safer.

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1 comment

Dividends Down Under September 1, 2016 - 9:23 pm

I completely agree with you, CFD trading is very dangerous and occasionally you see a story of people losing their life savings doing this (what the hell were they thinking?). We will never do this.

Tristan

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