Top 6 Reasons Why CFD Trading Is Not For Beginners


As a beginner in trading, there are things you should know before getting started. One of which is whether CFD trading is the best financial instrument for you.

As you may already know, a contract for difference (CFD) allows traders to make a profit through price movements without owning the underlying asset. This happens when the buyer and seller agree to sign a contract. It indicates the seller is being paid based on the difference in the value of an underlying asset between the opening and closing of the contract.

So instead of buying a stock, investors can speculate whether the price of an underlying asset will go up or down. But aside from the percentage payment, some brokers also require commissions once a trader wins.

If you’re a beginner and want to try CFD trading, here are some reasons why this might be the right financial instrument for you!

1. Not regulated

Some people positively look at this fact. Since CFDs are not regulated, they can easily trade wherever and whenever they want. But the downside is that since it’s over the counter, you may encounter brokers that can’t be trusted. In the end, it’s the risk you have to take when you try CFD trading.

Did you know that CFD trading is illegal in the US? However, some countries issue changes in the regulation, including Australia, Spain, and Canada. Additionally, they stated that the leverage for retail investors is now lower than before.

So if you’re looking for a CFD broker, it’s best to do some research first, instead of relying upon their liquidity.

2. No guaranteed profit

Even though CFD trading offers a great deal when it comes to paying for a percentage of the value of an underlying asset, there are other fees included in this contract.

Some of these fees are the spread, commission, and other financing costs. Since CFD trading allows speculation on the price movement of the underlying asset, there are times when there are just small movements involved.

When you focus on the difference between the value of the underlying asset on the opening and closing of the contract, there are scenarios when you’ll be able to let go of the potential profit. This usually happens when the market is severely volatile.

So before you start CFD trading, ask yourself, if it’s better than traditional trading.


3. High-risks

CFD trading moves fast, so it requires close monitoring. Did you know that you need to maintain margins to keep your account? When you keep trading and losing, you must deposit a substantial amount of money, or your account will be closed.

And since the market is usually volatile, even if your account has enough money right now, it can change when it moves against you. Are you willing to take the risks? As a beginner, it might greatly affect your profile, especially since you don’t have enough experience yet.

So would you rather experience countless losses just because the investment is cheaper, or take the traditional way to come up with a great profile?

4. There’s leverage

If you’re going to look at trading websites and blogs, everyone’s warning traders that leverage can be a double-edged sword. It’s good that it’s there to help you get started with your trading journey, but it can also be the one to finish you when you’re hanging on a tread.

Another term that you may encounter is that it can magnify gains and losses. In unfortunate events, there are times when the losses tend to be more than the capital.

And although there are ways to limit losses, like using a stop-loss feature that triggers automatic sell-off when the value hits a certain amount, it’s still not enough.


5. Not owning anything

CFD trading doesn’t let you own anything. Since you’re paying for a small amount to be able to trade, you don’t have any right to the underlying asset. You’re just there to speculate, but with some profit to gain.

That’s why it’s important to have a credible broker. Since they own the underlying asset, they have all the rights, so there’s nothing you can do if they do something unethical.

As mentioned, when looking for a broker, you should rely on the reviews, experience, and essential information instead of their liquidity. In addition, they should offer the features and regulations you’re interested in.

6. Overnight fees

When you trade CFDs, you can open short or long positions. However, when you choose the long position, there are overnight fees based on daily charges and other factors. So when you let the trade open for quite a while, there might be a significant among of money you’ll spend.

When trading CFDs, you should have a plan when you aim to open long positions.

Now that you have enough knowledge about CFD, you can now decide if you still want to try it or not. Let us know your thoughts about CFD trading by leaving a comment below!


Aliana Baraquio is a web content writer at FP MARKETS, a global Financial Technology services Foreign Exchange (Forex) and Contracts for Differences (CFD) broker established in 2005. She also loves reading about interior design and home makeovers.

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