Learn to be a Financial Hunter - Not the Hunted




You Are Here: Home > Stockmarket & Trading > CFD Section > CFD Guide > Pluses & Minuses
CFDs: Advantages & Disadvantages
Page Summary:
CFDs on the whole are great products, their advantages and disadvantages are listed on this page. Note, often the secret to working out whether a product is any good is to focus on the downsides.

CFD - Advantages

CFDs : Advantages & Disadvantages
  • Leverage - This is both an advantage and disadvantage (see below). The advantage is where small movements in the underlying can translate into large profits as a percentage of money invested

  • Go long or short - traders want flexibility and the ability to go short is so important with CFDs. Not sure what short selling is - see our guide

  • No Stamp Duty levied - Saves 0.5% a trade. If you do a lot of trades that's substantial chunk of money as the cost of doing business is a critical component to profitable trading

  • Trade equities and indexes - CFDs are not just for equities, they're also offered on stock indexes such as the FTSE 100, Dow Jones and Nasdaq - and any product that offers traders more flexibility is a good thing

  • Can bid and offer the market - If the current quote of Barclays is 301-302 you have the option of joining the bid or the offer and that's always a massive advantage when trading, although bidding the market or offering doesn't necessarily mean you'll trade at that price

  • CFDs mirror the underlying shares - CFDs will mirror the movement of the physical shares unlike a spread bet market where the price is based off how the physical shares are trading. Although not all CFD brokers offer this - see this page for more

  • CFDs don't expire - CFDs are not like futures, options or spread bets in that they never expire. Theoretically you could buy or sell short Vodafone shares today using CFDs and still have the position in a year's time

  • Tight bid-offer spreads - As most CFDs deal at the same price as if buying or selling the shares in the cash market, the bid-offer spread will be as tight as possible. This is in contrast to spread bets where the bid-offer can be wide which therefore makes them more expensive to trade LearnMoney.co.uk Spread Betting section

  • Low commissions - Commissions range in the 0.1% - 0.3% level (for both buying and selling). 0.1% is the same level the large institutions are charged which is obviously good for individual traders

  • Good software - Most of the CFD brokers have excellent online software, often far better than that which stockbrokers offer their clients

  • Tax is paid - Some might question whether paying tax is an advantage. But it's always better to think in reverse so if CFD profits are taxed (over the annual capital gains tax allowance) that also means losses are offsettable against tax, and that's the advantage if you lose

  • Hedging - CFDs can be used for hedging a stock or portfolio, in fact they're far better products to use than spread bets. This is because a hedge is two trades, one long and one short and therefore one of the trades will lose money so you want the losses to be offsettable against tax. But losses on spread bets are not offsettable. Make sure you understand this point as it's important

  • Ability to place stop losses - Most brokers offer stops as a feature of their online software and this is a good advantage for CFD traders. Note that stop losses are not normally allowed to be entered if you use a stockbroker to trade the physical shares (not CFDs). More information on Stop Losses - What are they - How to use them

CFD - Disadvantages

  • Leverage - Leverage is similar to fire - it can be your best friend but also your worst enemy - so it has to be used intelligently and it must always be respected. Don't forget the streets of Wall Street and the City of London are littered with good traders who lost it all because they used too much leverage....

  • Financing - Hold a long CFD position more than about 5-6 weeks and the financing costs start to get expensive, ie it's cheaper to buy and hold the shares outright rather than use CFDs. More on CFD financing including examples

  • Tax is levied - Tax is both a possible advantage (see above) and a disadvantage. If you're profitable it's a disadvantage and depending how profitable (the more the better) Spread Bets with their tax-free advantage might be better
LearnMoney.co.uk comment

Listed above there are 13 CFD advantages but only 3 disadvantages which on paper suggest that CFDs are almost perfect products for trading and speculating on the markets.

But whereas there's no doubt CFDs are extremely useful and versatile products their main disadvantage without a doubt is leverage or rather losses caused by excess leverage. However, with proper risk control and always using a stop loss the leverage problem can easily be controlled and losses kept to manageable amounts.

FREE Report

How to Learn Spread Betting and Prosper

How to build the all-important trading experience
Where to get trading help and advice
Which broker to use and why
Simple 2 month training plan to follow
More details
[an error occurred while processing this directive]

© 2019 LearnMoney.co.uk All rights reserved

The information on the LearnMoney.co.uk website has been compiled from sources believed to be reliable, but is not warranted to be accurate or complete.
All recommendations and comments are provided for general interest only and should not be construed as advice.
Professional advice should always be sought before buying or investing in any financial product.
The price of securities and any income from them can go down as well as up.
Past performance of a security or market is not necessarily indicative of future trends.
Any opinions and recommendations on LearnMoney.co.uk are given in good faith, but without legal responsibility and are subject to change without notice