CFDs, what are they, how do they work and above all are they right for me? The answer after the acronym, huh? Constantly searching the internet for things related to finance, it is normal that as advertising I often come up with things of financial products. So current accounts, credit cards, trading accounts and among them also CFD brokers. These advertisements are usually very attractive and target a specific target that has very little experience in financial matters or even in the specific case of three. And always talking about tempting advertisements, it is normal for people to worry or ask questions, to make doubts about these CFDs. So in short, today let’s try for a moment to understand what they are and how they work and above all the fundamental thing. If they are a suitable tool for you, then suitable for your needs, how much do you have in mind to earn? How much are you willing to risk? Well, let’s move forward before moving forward, but I have to make a very important premise.
Speaking of CFDs reading a bit online to inform myself before making this video I could not help but notice that almost all articles or videos are totally impartial. Articles on finance sites often have a link at the bottom to sign up for a particular broker, so they are articles that inevitably end up being biased, because for every click on that link there will be a The same thing can be said of videos on YouTube in which there is always a link. Sign up for this account and even then the video ends up being unbiased and telling only a part of the CFD. This video is totally independent, so I will not talk about any broker. Specifically I will not put any kind of link precisely because I want to tell the pure and simple truth without any kind of filter given by the fact that they are affiliated with someone else. So I mean, I hope you enjoy that. Now we can finally start and let’s start right away by saying that CFDs are derivatives, so their price comes from the price of something else.
For example, if I buy a CFD on a fiat share, I am not buying a fiat share, but I am buying a contract in which it is written that the price of this contract varies exactly according to the price of the Fiat share, a sort of Chloe as far as the price is concerned, so absolutely nothing changes. A share costs ten euros very well. The share CFD of that share will still cost ten euros. Fine. After the explanation, now we can move on to the most interesting part of this video, or the pros and cons of CFD, starting from the advantages and in this case from the commissions. Commissions on CFDs are very low or even nil. So there are no commissions when we buy something, just as there are no commissions when we sell something short, which normally has costs and is also not too low. It may seem strange to you, but CFDs have no commissions. It is not a scam, it is not a deception, it is pure and simple truth. And how is this possible? Well, CFDs are created directly by the brokers you are buying them from.
So if they create them themselves, they do not have any kind of management cost. Because well, it’s always their stuff, which they have when they find themselves managing other people’s things like stocks, junior bonds. Clearly, even if there are no commissions there is always the spread. So the difference between the sale price and the buy price and you always have to look at how much the spread is, because if it is a few points it is not a big problem, but when there starts to be a spread of twenty thirty points, maybe because the CFD is not very trade, which often happens for very exotic currencies, Well, in that case the cost can be felt even if there is no commission. So there are no commissions. But still watch out for spreads. It may be because they cater to an audience that knows little or nothing about finance, but CFD broker sites are extremely clean, unlike traditional brokers. On the latter, in fact, often the information is very confusing, exposed in beautiful ages that are not always clear.
Sometimes you think that it becomes difficult to even understand what the purchase price is. Let’s realize third brave CFD leverage or finally we have reached the most important point. CFDs are all leveraged, let’s take the most trivial example ever a CFD costs ten euros and the leverage is one to two. This means that I will put only half, so five euros and the other half will be put by the broker. Now let’s assume that the CFD increases by twenty percent and then goes from ten to twelve. I will have thus made two euros of profit, two euros that go entirely to me. So these are also not divided between me and brokers. Be careful, however, the opposite rule also applies. So if the CFD loses twenty percent going from ten to eight I will have lost two euros and the loss will not be divided between me and the broker. The leverage on some CFDs can be very high even up to thirty. So buying a CFD that costs ten euros means that I will pay it only thirty cents. So what? In short, the last pro.
The fourth advantage is almost self-explanatory and is the low capital. To invest in CFDs, in fact, you do not need large sums, indeed, just start from a few tens of euros precisely because this system of leverage exists. This is the main advantage of CFD, namely the fact that you can start even with very very low capital and get proportionally higher results. It all looks beautiful, doesn’t it? Well, that’s not quite the case. And now we also see the other side of the coin, which is the cons of disadvantages. The first disadvantage, which is not trivial, is that with CFDs it is impossible to invest in the long term. Before I said that there are no commissions and I confirm it, but there are no commissions only if we open and close a position within a day the famous trading.
However, there is a particular type of commission called overnight reward, which is triggered when we have obtained an open position for more than one day. This is a cost that we will be charged if we still have open markets when the markets close. So let’s assume you have a CFD that is quoted on the Italian stock exchange. Well, when the Italian stock exchange closes at this point, if we still have that CFD in our portfolio, here comes the overnight premium. A premium that is usually quite expensive ranges from two to three percent, depending on the brokers. Two percent may not seem like much, but with leverage everything is amplified and I’ll show you how expensive this small two percent can become. For our example we use an overnight premium of two percent per year, which is quite in line with what I’ve seen on the most popular brokers. This means that if we hold a position open for more than one day, so let’s assume one day well, we will be charged a cost of two percent fratto three hundred and sixty-five a day that a very very low number but this is also subject to leverage.
If, for example, the CFD we are buying is subject to a very high leverage and we keep a position open for ten days, well, we would have paid percent just to keep the position open, which is a lot of one percent in ten days is an absolutely crazy figure. So in short, the only thing you can really do with CFDs is day trading, so open and close one within a day. Second disadvantage CFDs are not as simple as other products are made out to be. CFD advertisements are specifically designed to attract the beginner, the one who has never traded and make him believe that trading CFDs is an easy thing for everyone, when it is not. In fact, perhaps it is quite the opposite. And in fact the golden rule is that the smaller the time interval in which we operate and in this case it can reach a maximum of one day we have said the more difficult it becomes. It takes technical skills, ability to recognize patterns and it also takes a strong mental solidity not to fall prey to emotions.
So in short, trading, whether it is share CFDs or what the hell it is, is not suitable for those who know nothing. A person who knows nothing and tries to trade a little instinctively will lose money. The same can be said of those who have made a cursive of four hours of perfect trading even that person will lose money so in short, if you are not going to study, learn patterns, technical analysis, leave CFDs alone because if you normally get hurt here the pain is amplified, so let’s forget the third disadvantage we have already said before among the advantages and it is the leverage as you wanted to demonstrate, the greatest merit of CFDAs is also their greatest flaw. Leverage, in fact, is a great tool to make huge profits in a short time, but it is also an equally excellent tool to burn your entire capital without even realizing it.
Operating in leverage is extremely risky and this is a risk that is usually not understood, indeed it is quite diminished precisely because to face reality it is always hard, to understand each other, operating on a CFD that shares one having as leverage? Well, a fluctuation of five percent that is quite common especially in markets such as commodities or stocks, can make us gain one hundred percent, or lose the entire capital all in the space of a day. Also, in many brokers it is not possible to select leverage, so if the broker has created a CFD with one-to-five leverage, so that’s how we have to keep it and so we can never change it. So, as usual we draw two conclusions in the first place, before you ask me below, in the comments No, I do not have on CFDs but I do not like CFDs and I find in general all derivatives too speculative.
But apart from that, who are well suited to all people who want to launch into day trading, possibly after having already tried a type of trading on inter go longer, so maybe over weeks, months or even years, although in that case we could talk about investments and not trading. As I said before, in fact, working on very small time intervals requires enormous skills and having already had some experience in other worlds can only help you. Moreover, as already mentioned before CFDs are extremely speculative, so of your part of the capital you want to dedicate investments to trading, possibly dedicate only a very small part to CFDs, because they are a very risky instrument that increases your risk profile even with only ten twenty percent invested in this instrument. I hope this video has removed some doubts if you leave a nice like or if not, write below in the comments. If you still have something that is not clear to you what else to say, I will greet you and see you next time.