One of the financial activities many are considering as a great alternative to stock ownership is trading. There are various types of trading that many people do and love. Stock, crypto, foreign exchange, and CFD trading are some of the most famous trading activities.
Aside from the four trading types I mentioned, there are more that many use to double their initial payout. Trading activities have become massive in the last decade, especially with the rise of technology and social media. However, one of the trading types many financial brokers offer is CFD.
CFD trading allows you to speculate on the price of an underlying asset, including shares, indices, commodities, cryptos, forex, and more. Investopedia defines a Contract for Differences as an arrangement in financial derivatives trading where the settlement differences between the open and closing trade prices are cash-settled.
CFD trading can be complicated and overwhelming, especially if you’re just starting. If you’re considering it, this post is for you. Here are six reasons CFD trading might not work for you.
The people we spend most of our time with affect our daily decisions, actions, and moods. Often, the people around us influence the choices we make daily. And if you know people in your life who are telling you to try CFD trading, but you know nothing about it, it could be a challenging and rocky start for you.
Of course, many people can learn and discover that CFD trading is for them as they move forward in their trading journey. However, mindlessly starting trading without knowing what you’re doing could only cause you to lose money. If you know you’re not for it, I recommend doing your research first and watching tutorial videos before officially starting.
Like any other financial transaction, CFD trading involves spending money. Usually, your broker won’t require you to pay any fee for opening an account with them. But you’ll need to invest your initial capital to start trading an underlying asset you prefer.
If you’re a big spender, the temptation to invest more despite losing money can beat your finances. If you think you are prone to doing that, I consider choosing a broker that offers demo accounts. With a demo account, you can trade without spending real money. It’s a trial program that allows you to access trading charts, tools, and other features you’ll use when trading. Having a demo account will help you decide whether CFD trading is compatible with you.
Yes, some people rely solely on trading as their income source. However, most of those people are professional and long-time traders. If you don’t have extra funds to sustain your lifestyle and pay your bills, relying solely on CFD trading as your income source is a poor choice.
Unless you have enough knowledge and experience with CFD trading, resigning from your job and investing all your money in trading is a gamble. That’s why if you think this way, you should reevaluate first your compatibility with trading and its profit return for your needs.
Even though many people recommend CFD trading, it’s one of the financial activities that comes with risks. If you’re only considering starting CFD trading due to the suggestions and recommendations of the people around you–but you have a limited and tight income flow, I wouldn’t recommend opening an account immediately.
Typically, brokers require traders to maintain adequate margins for their leverage losses. If you lose all of your initial investment and have a tight monthly income flow, it will be challenging to maintain and keep your trading account or even get back your initial investment.
One of the ultimate downsides of CFD trading is its liquidity rate. Happenings from around the world impact the liquidity of your underlying asset. If a massive event or news is happening worldwide, and the demand for your underlying asset suddenly declines, your CFD may become less liquid, as stated by FP Markets, one of the leading brokers.
CFD trading can be impractical, especially if you need immediate cash. If you allocate a lot of your money to CFD trading, you can’t expect instant access when you need it during an emergency.
CFD trading is a legal financial service. However, its regulations are limited and not as well-defined as other trading and financial activities. As Investopedia says, the CFD industry is not highly regulated and has weak industry regulation.
On top of that, many forex brokers operate illegally. That’s why, choosing a legal and professional broker is critical when starting your trading journey. A well-regulated broker can provide you with the best trading tools, updates, and perks that will tremendously benefit your trading.
Despite these reasons why it might not work for you, you can still ace trading CFDs as long as you learn about the market. You just have to learn about the market by managing your expectations and allocating enough money that you’re willing to lose and never earn back.
Written by Bianca Banda
