Share CFDs are the most popular financial instrument in today’s date that would allow a person to speculate on the movement of any share without owning the underlying stock.
Trading in this manner has opportunities with rising and falling markets, and thus attracts one who wants to maximize his return in any market condition. However, like all trading strategies, share CFDs also have its risks that need consideration of a trader to attempt it.
A significant advantage that share CFDs provide is the opportunity to trade in both upward and downward directions.
While in traditional stock trading you can only make a profit if the price of the stock goes up, with share CFDs, you can go short on a position; hence, it brings profits as well if the stock price goes down. Therefore, this provides traders with flexibility in both bullish and bearish markets, which gives them more chances for profit.
For instance, if you think that an individual share for a company would decline because it is priced too highly, you could short sell the CFD and subsequently earn when the price of this share is falling.
The other most important feature of share CFDs is that there is leverage and this permits you to make a much larger position than you could afford with the initial deposit. For instance, when a broker offers leverage of 10:1, it means you can control a position worth $10,000 using only $1,000 of your capital.
In many cases, this would greatly enhance potential profits. At the same time, though, it also magnifies risks. If the market goes against you, then your losses will similarly be magnified. You could end up losing more than your initial investment. Thus, risk management would become a very important issue in trading share CFDs.
Some of the most important strategies to avoid significant financial damage in this regard include setting stop-loss orders and using other tools to limit possible losses.
One other benefit that share CFDs provide is access to global markets. Stock trading often limits you to stocks as per the local listings, nor does it necessarily open doors to trades on international markets, though you don’t have to buy the underlying stocks. This provides you with more diversification routes as you can invest in the stocks of different countries and industries.
This also may help to diversify risk as you are not having to rely on the performance of just one market or sector.
Share CFDs do come with risks, however. Although they could post very high returns, they come with a significantly higher risk than ordinary stock investment.
The market can be very volatile, and traders can easily end up on the wrong end of a trade without the right strategy. Since share CFDs are derivative instruments, there are also additional costs in spreads and financing fees that are going to eat into profits over time.
In other words, share CFDs are a very versatile tool to trade price fluctuations of equities with access to global markets. The two features-the facility to trade both ways and leverage-are beyond the control of novice traders. Hence, novices have to take particular care and gain through firsthand experience about how share CFDs work before investing in this category of trading.
If approached in the right way with proper risk management, share CFDs will be an excellent addition to a trader’s investment strategy.