What are the downsides of CFDS?
- Thread starter cashclay
- Start date
Is your sceptism about that particular broker, or against CFDs in general?
Here are some examples given, and some of the risks described:
https://en.wikipedia.org/wiki/Contract_for_difference
It also says this:
"- Trading is done over-the-counter with CFD brokers or market makers;
- CFDs are not available to US residents;
"
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CFDs aren't necessarily bad but there are a few caveats to keep in mind when considering them:
- A contract for difference doesn't yield the interests or dividends that you'd get holding the underlying instrument.
- Most CFD brokers will charge interest for the value of the underlying virtual position during the period held, making long-term (more than one week) positions often too expensive to hold.
- Your "broker" is the market maker, a.k.a. "bucket shop", a.k.a. "B-booking". This means that yes, you get instantaneous executions of unlimited size (within your leverage limit) because your broker is taking the other side of your trades.
- On the other hand, CFD brokers usually don't charge a direct commission, but instead widen the bid/ask spread in order to guarantee that they wouldn't lose money if they hedged any trade they took against their customers. Even at big places like Oanda, these spreads get very wide around news reports or during periods of low volatility in the underlying instrument. If you're looking to hold very quick positions (less than an hour), those spreads may often be too expensive.
- B-booking brokerages make money because their customers, on average, tend to lose more money than they make, so by taking the other side of their trades they simply use the money collected from shrinking accounts to pay the few growing ones. Nowadays they also use sophisticated software to transfer some flagged traders into "A-booking" if they're too successful, which means for those, the broker will hedge in the underlying market to avoid losing money.
So in summary, CFDs are at their best for bets longer than an hour but shorter than a week, but options can also confer the same kind of leverage in those timeframes with a time decay cheaper than a CFD's interest rate, so they should be considered as well.
One downside is that CFDs are not regulated, and so are traded Over-The-Counter (OTC).
And it seems that by US law CFDs are not available to US residents.
That could be the reason why not many daytraders use CFDs.
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IMO resident is correct, b/c no resident, be he/she a citizen or just a visitor (like an exchange student or invited foreigner etc.), may do things that are illegal in that country...
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don't listen to his advice on foreign exchange students. if you are in that position consult the tax authorities or a lawyer.
on ET , there are a number of people lacking in expertise who are quick to give advice, much of it right like a broken clock, twice a day.
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All day traders are trading them in Europe (certainly the UK because they don't charge a 0.5% duty). But they trade them direct market access not some crappy brokers price.
As far as the salesmen goes, BE CAREFUL if he's offering you a 'managed account', as a) 95% chance you won't make any money, and b) all your money will soon become the property of the brokers...
they won't tell anything different, and not for that cheap ;-)