Pluses and Minuses of Trading in CFDs

CFDs are a relatively new product in the Australian markets. Trading in CFDs has many advantages such as lower margin requirements, simple pricing, easy access to global markets, the ability to short sell, absence of day trading rules and little or no commissions and transaction fees. Actually, CFD is the latest blue eyed boy of the market.

CFD refers to contract for difference, a tradable product where settlements are done on the basis of difference between the closing and opening values of the trade. It relates to an underlying asset and the only thing that matters is the price difference. This means that prior ownership is not necessary and traders can profit by short selling if they are bearish on the underlying asset.

However, despite so many advantages, each trader must weigh the pluses and minuses of CFD trading and proceed accordingly. There are certain disadvantages of CFD trading that have to be taken into account before settling on any trading plan.

CFDs are traded on spreads, the difference between the price at which providers of CFDs sell and buy a CFD. Having to pay the spread on entry and exit means that traders cannot benefit from small move. The spread reduces the profit from winning trades and increases the loss in losing trades by a small amount. If there are commissions and fees and regulations in stock markets, providers of CFDs have their way of cutting down profits of traders with larger spreads.

Another minus point of trading in CFDs is that the CFD market is not as regulated as the stock market is. While there are many reputable CFD providers, being an over-the-counter market, traders still need to be careful while selecting whom to trade with.