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Trading With CFDs: Risks & Common Errors

Updated on July 12, 2017
Alessio Ganci profile image

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Trading with CFDs: everything you should know to operate and reduce the risk of losing your money.
Trading with CFDs: everything you should know to operate and reduce the risk of losing your money.

Trading in a Minute

CFDs (also known as contracts for difference) are an easy way to trade. Instead of buying stocks or commodities shares, you are speculating on their values without physically owning them. So, when you decide to trade with Apple stocks, you are not physically buy them (so you do not get ownership) but you are only speculating on their value and opening a contract with your broker: if Apple stock gets higher and you close the position, the broker will credit the difference on your account, otherwise, if you lose your money, the broker will keep them and you will be able to close the position at a less price than the initial value.

CFDs are ideal for people who only want to trade without getting actual ownership of a company's share, they have less costs and you do not need to pay high commissions. In addition, you will get dividends, just like if you owned the physical stock.

CFDs
Physical Titles
They have less commissions
They may have high commissions and you may need to pay taxes
They allow you to instantly speculating on values.
You will need to order your stocks, you are not doing a short-term trading
They give you all the earning opportunities of physical titles, but you do not have any ownership
You physically own your stock, so you are a true ownership of a company's share.
The differences between trading with CFDs and purchasing physical titles.

The Errors You Should Not Do

CFDs are a very risky tool and you should not trade with them unless you are very sure of what you are doing. Remember a man lost 500.000 dollars by trading with them, so you need to trade with CFDs only if you are expert and really sure of what you are doing. Here you will find some errors you should avoid to do, in order to reduce the risk of wiping out all your money.

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Thinking It Is Easy

Some people trade with CFDs because they see them as a very easy way to earn easy money: you open the position at less and you close it when it is high. Unluckily, this is not so easy, as markets are unpredictable. You cannot open a position just when it gets down and hope it will return high, because it's not sure what will happen with that position. In addition, you should pay attention to your equity: if your position value gets lower than your account value, you risk to have the position automatically closed, so that you will lose your money. That's why it is strongly reccomended to deposit some money in your broker account and "park" them, without investing them, so that they will cover losses. But in addition, it is reccomended not to put too money in a single position, instead you should trade with different stocks/commodities/forex titles, so that you reduce the risk of having a stock falling down.

Opening and Closing Positions Too Often

If you open a position and close it after some seconds, just to earn the little 0,3 cents of difference, you are scalping, and that's not allowed by many brokers. But even if you close them after some minutes, it is still not a reccomended way to trade, because you are actually spending too much time logged in to your broker account. The easiness of this process may led you to compulsively trade, and this may become similar to some typical behaviours of people who play by chance. CFDs, from a financial tool may become risky if you consider them as a game, so it is better to open and close long term positions, without spending too much time.

Be Stubborn

If you see a stock is getting down, down, down, and it seems not to have little chances to get higher, you should accept your money loss and close the position. If you continue to keep your position opened, you may even lose all your money (for example, because of equity). You should not expect a position is going to get high another time after it had a rapid fall.

Forgetting to Apply Protections

Your broker offers you a brilliant way to avoid serious risks: you can ask to automatically open a position at a certain value, and close it at another value. In addition, you can set a value limit to which automatically close the position if it gets down. By doing this, you are reducing your risks, and that's why this is the best way to trade with CFDs.

eToro is one of the most famous brokers in the world of financial trading.
eToro is one of the most famous brokers in the world of financial trading. | Source

Choosing the Wrong Broker

You should always pay attention to the broker you are choosing. Search for information about it, if you can trust it and where does it is established. Actually, some brokers you can consider are eToro, Plus500 and Markets.com. Sometimes you can also enjoy a free welcome bonus, in order you can start to trade (even if I strongly advice you to get practice with demo accounts, before getting into real trading).

© 2016 Alessio Ganci

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