Common Myths About CFD Trading - Debunked
Contracts for difference, or CFDs, are usually referred to as an over-the-counter product by trading circles. But do you know what it means?
We have CFD trading explained for you! So, think of a derivative financial product that enables you to speculate on the price movement of underlying assets without owning the assets themselves; that’s CFDs.These financial products derive their price from the underlying share or index they track.
In simpler terms, it's a way to trade all sorts of financial stuff- stocks, currencies and even cryptocurrencies- without actually buying things themselves. The leverage factor for this among retail investors is that is, it provides incredible flexibility. This means you can make a profit from both rising and falling markets.
You can also leverage to control larger positions with relatively small capital outlay. Despite its popularity, lack of knowledge has created many common CFD misconceptions which are often overlooked by potential investors and prevents them from exploring its benefits and opportunities. In this article, we will be debunking CFD myths and discuss the most common CFD trading myths and provide you with CFD trading facts.
CFD Trading is Just Gambling
Myths about trading in CFDs are that it is merely gambling. For almost all trades there is a certain degree of risk and uncertainty about the outcome. But, if CFD trading is learned and well practised it, too, is not about gambling.
Complete Analysis includes market trends, economic indicators and corporate performance as well as technical signals. Professionals test their strategies through backtest and make the changes according to the experience from the market conditions and performances.
Professional traders are the only ones that can trade CFDs
Most people think that this is too difficult to be attempted by beginners and that it should be completely left up to the financial professionals experienced over many years. In fact, today's trading platforms virtually democratized the access to trading in financial markets-from CFDs to stocks, options, and much more. Certainly, one will need experience, but a beginner can learn and go on to trade CFDs by starting small and having the priority of education.
CFD Inevitably Risk-Free
Certain promotional tools minimize the risk and potential danger of trading everything in CFDs. There arises a misleading impression that profits from CFD trading are essentially risk-free.
Trading is always carried out under risk while certain risks are inherent in the case of CFDs which need to be understood and addressed by traders. The leverage feature that adds attractiveness to the CFDs for its stunning earning power also makes losses much bigger.
Market volatility with leverage, margin calls, or overnight financing costs adds to the risky side of CFD trading. Unless effective risk management strategies are in place, traders might find their trading capital suffering depletion within no time.
CFD Trading Platforms Are Overpriced
It is widely believed that CFD trading involves astronomic fees and commissions that make it a preserve of wealthy investors. Modern CFD brokers are increasingly launching trading pricing, many of them providing commission-free trading on some instruments. Many also offer accounts with very low minimum deposits, sometimes even $100 or less and thus make the CFD markets accessible to traders with limited capital.
CFD Trading Is Only for the Day Trader
The presence of high leverage and liquidity indeed attracts the attention of most traders who want to make their trading short-term, using CFDs.
It's true that the overnight financing charges now make long-term holding relatively more expensive than traditional investing, but for those positions held days to weeks, the cost in terms of trend can be justified by the expected profits.
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