What are the main advantages and disadvantages of trading stocks CFDs?

trading stocks CFDs

The recent positive activity in the stock market, despite a resurgence of fears related to the COVID-19 pandemic, attracts the likes of retail traders. They want to gain exposure on stocks and take advantage of price movements, but as uncertainty remains elevated, the short-term approach gains the upper hand.

For the time being, however, world stocks struggle near record highs during a seasonally-positive period. That is why retail traders should be aware of the top benefits associated with trading stocks CFDs.

Flexibility to buy or sell-short

Although the sentiment tilts in favor of buyers, for now, stocks can move both up or down. In a situation of prices falling, the ability to sell-short might mean the potential to get involved and take advantage. With CFDs, traders have a flexible approach and should buy or sell, depending on how market conditions change.

Prices can’t move up in a straight line and despite record highs for the major indices, numerous stocks are underperforming. Only a few stocks such as Apple, Amazon, Tesla, or Microsoft do the heavy lifting, which creates bearish trade opportunities for smaller companies.

Leverage should be used in a conservative manner

On the negative side, however, traders should consider how they use leverage. CFD trading is done on margin and this could act as a double-edged sword. Stocks are some of the most volatile instruments, which means it would be appropriate to keep low leverage and risk a small percentage of the trading account on any given position. Compounding returns is how trading success can be achieved in the long run.

In a market driven by emotions and FOMO, traders might be tempted to overleverage or increase position sizing. These actions can have negative consequences in the long run.

Overnight swaps can weigh in on longer-term trades

CFDs are instruments designed for short-term trading. Holding a position for weeks or months means traders might have to pay an overnight fee, which adds up over time to a substantial amount. If the market is volatile and the overall return is increasing at a fast pace, the swap can be justified. Most of the time, an intra-day approach results in lower trading costs.

Keep in mind that these costs ultimately depend on the CFD broker chosen. Different companies have different policies with regards to trading fees and it is up to the trader to conduct an in-depth analysis to see which company offers the most attractive conditions.

Stocks CFDs are appropriate when volatility is high

When trading CFDs, prices need to be volatile and have a clear directional bias. These instruments are not suited when markets are balanced and stable. That is why traders must constantly watch for stocks that are actively traded because that is where accurate trade opportunities could emerge.

These are just 4 of the aspects traders should consider for CFD trading. All in all, CFDs remain popular, and most regulated brokers continue to provide their customers with access to a variety of CFDs.