Stock CFDs allow a trader to go long or short on a stock without actually owning the underlying asset. For short-term traders, this may be an advantage, but for long-term investors, the pros and cons must be weighed.
One advantage that one can have by using stock CFDs for long-term investments is that of potential high leverage. Leverage allows you to control a larger position with a smaller amount of capital and means your returns could be significantly amplified. This can translate into substantial profits for the long-term investor, provided the market moves in your favor. Another feature of stock CFDs is that they allow you to go both long and short. This makes it easier to gain from a rising and a falling market, which is very useful when trading extended periods of time.
There’s also the benefit of lower capital to trade with. Since you don’t own the actual stock, you don’t have to commit as much in initial capital as you would have to for regular stock trading. This would mean a much diversified portfolio where you can trade virtually many assets without requiring huge investments from your end. Additionally, through stock CFDs, you can better handle your positions because you can use stop-loss or take-profit orders in managing risks and protect you from unexpected market movements.
There are, however, downsides to long-term investment using stock CFDs. The first and major one is the cost of holding positions for extended periods of time. Stock CFDs often carry overnight financing costs that detract from profits over time. These fees can really add up, mostly if your market stays oddly static or in favor, moving slowly. As such, stock CFDs remain less suitable for the type of long-term investor who likes to hold positions for months or even years.
Another concern is the leverage risk. While amplifying profits, leverage also amply increases losses. Within a volatile market, significant losses are likely to be high, and the market condition might change when long-term investments are involved. Traders who do not properly manage their risks may get themselves into a difficult position. Moreover, stock CFDs do not provide dividends, which, in general, are one of the major attractions for long-term investors. This means you might miss receiving regular income from dividends that can complement the entire return on your investment.
Although highly flexible, potential returns from stock CFDs pose a great risk to long-term investors. Various holding position costs and lack of availability of dividends are vital consideration tools that precede the usage of stock CFDs for long-term investments. More so, any impression that volatility in markets may afflict may further difficulties to long-term investors in trying to predict trends over long periods. Furthermore, the constant need for monitoring and the possibility of the higher side of price swings can create stress and uncertainty. However, for those willing to take these risks and keep a closer eye on what the market is presenting them with, stock CFDs are certainly available, though they should not be every investor’s cup of tea.
