CFD certificates are financial instruments that allow you to make leveraged investments in a wide variety of different assets. CFD:s are always based on a financial asset. This asset can be a stock, a currency pair, an index, or a commodity or almost any other publicly traded asset. The financial value of the asset governs the value of the CFD. If the value of the asset goes up then the value of the CFD go up. If the value of the asset goes down then the value of the CFD will go down. There are also so-called bear CFD:s. These options increase in value when the asset goes down in value. It is possible to trade leveraged CFD:s. You can read more about what this means further down in the article.
It is essential to understand that you never own the underlying asset when you buy a CFD. The CFD is a contract between you and the broker. It has no other value. CFD:s are designed with day traders in mind and are meant to be bought and sold on the same day. You have to pay a fee if you want to hold your CFD:s overnight.
Why you should trade CFD:s
There are many reasons why you should trade CFD:s. They:
- Make it possible to earn large returns without having to invest large amounts of money.
- Allow you to make a living as a day trader without already being rich. USD 10 000 or less can be enough to get started.
- Allows you to make money in any market. You can profit from assets going up or down in value.
- Instant transactions. You do not have to wait until you find a buyer for your assets.
- Low trading fees for short term transactions.
- Large selection of brokers to chose among.
- Allows you to trade all major currency pairs, major stocks, indices, and many commodities.
Why you should not trade CFD:s
Below you will find some of the reasons why you should not trade CFD:s.
- The trade is very high risk. High leverage increases this risk.
- You can lose more money than you invested.
- You can lose more money than you have deposited to your account. There is no limit to how much money you can lose. (Loses are limited to the money in your account if you are located within the EU and trade with a broker based within EU.)
- Trades should never be left unsupervised.
- You need to pay a fee if you keep your position open overnight.
- Should never be traded by passive investors. Only suitable for very short term trades.
Is it a scam?
CFD certificates are sometimes referred to as scams. This is not true. At least not if you trade using a reputable, regulated broker. CFD certificates can be a very powerful tool if used correctly. The reason that CFD:s are sometimes missunderstod is that they have been used by dishonest financial advisors to scam their customers out of money. They fool their clients into investing in CFD certificates without telling them the risk associated with the trades. Some financial advisors will even willingly lose their clients money to get the referral commission from the broker.
CFD:s are not suitable for passive investors, and 99% of all readers should avoid trading CFD:s. The one exception from this rule is if you are an active day trader. If you are then CFD certificates can often be the most powerful tool you have access to. Many day traders make almost all their money trading leveraged CFD certificates.