Disadvantages of CFDs
Interest
When a trader opens a short position on a CFD, his account will be charged if the company gives dividends. If the trader has sold the stock rather than using the CFD, he would not get any revenue from the dividend, consequently this loss is shown in the trader’s account.
Stop loss
The CFD provider actually gives a loan to the trader. Like with every loan, the trader has to pay interest on the margin to the CFD provider, and for that reason, CFDs are preferred on short term investments. In addition, if a trader leaves a trade open over night, an interest will be charged to the trader.
High risk
When trading, it is very important to include stop losses in order to limit the risk but these stop losses are usually expensive and have a limited life. Therefore, traders should take into consideration the expiry date and examine the sum being spent on guaranteed stop loss orders.
Dividends
When trading on a margin, traders have a higher risk than the investment the trader is putting forward. It is risky because the trader is required to put 10% of the investment and the rest is completed on margin, there is a possibility that traders may lose 10 times what they put down.
