CFD certificates are a type of financial instruments that allow you to trade stocks and other assets with large leverage. Many brokers allow you to trade with x250 to x 500 leverage. This allows you to make very large profits on small fluctuations in the market value of stocks and other assets. CFD certificates are a day traders best friend since they allow you to make large profits, large enough to live on, despite not being fabulous wealthy. It allows the trader to make the same profits at someone with a lot larger portfolio that invest directly in the assets.
CFD certificates are extremely high risk investments. You loses are not limited to the amount you invested. You can lose more than you invested. You can even lose more money then you have in your brokerage account. If you lose more money than you have in your account than you need to deposit more money into your account to cancel your debt to the broker.
Lets start by looking a little bit closer at how much money you can make and how much you can loose.
How much can you earn
There is no limit to how much money you can earn when you are trading with CFD certificates. The more the underlying financial instrument appreciates in value the more money you will earn. Lets assume that you have invested USD 1000 in a CFD with x250 leverage.
- If the assets appreciates by 0.5% then you earn a 125% return on your investment.
- If the assets appreciates by 1% then you earn a 250% return on your investment.
- If the assets appreciates by 2 % then you earn a 500% return on your investment.
- If the assets appreciates by 5% then you earn a 1250% return on your investment.
- If the assets appreciates by 10% then you earn a 2500% return on your investment.
CFD certificates will, as you can see in the examples, allow you to make large profits on normal daily fluctuations in the value of a stock or other asset.
A skilled trader can earn very large sums of money very quickly while trading with CFD certificates.
How much can you lose
You loses are not limited to your investment or to how much money you have in your account but they are not unlimited either. Your loses are limited by the fact that the asset price can not sink below 0. Your loses are therefore limited to your investment multiplied by the leverage. If you invested USD 1000 in a CFD with x250 leverage then you can lose up to USD250 000. Once you have lost 250 000 then the asset is worthless and the value can not sink any lower.
You can limited your potential loses by using a stop loss that automatically closes your CFD position if you lose a certain amount. Please note that stop losses are a great tool that I recommend whenever you trade with CFD certificates. They are however not a fool prof way to limit your loses to a certain level . You can still lose more in the event of a flash crash where you position cant be closed at the desired level.
You can also use binary options to hedge your CFD positions.
Most CFD brokers will work very hard to give the traders the tools they need to be able to be successful traders. CFD brokers earn more money the more successful you become. A successful trade will make more trades and is more likely to hold positions over night (and pay the overnight fee). All this make successful traders a lot more profitable for the brokers.
Brokers do despite common misconceptions not make any money when you lose money. All CFD:s are hedged on the open market and the broker makes money from the spread and the overnight fee. Not from your loses.
CFD certificates allows me to keep the bulk on my net worth in my low risk main portfolio. Thanks to CFD:s I can keep 85% of my money invested in dividend stocks. I do not have to worry about the daily stock price of these stocks and I know that I will be able to keep them for years. Thanks to CFDs (and to a lesser extent binary options) I am able to use a mere 5% of my total investments in working capital that allows me to make a decent side income. Enough to to pay my mortgage and to contribute to my main portfolio each month.
I often get asked why I do not invest more money in CFD:s if I really make good returns from them. The answer to this is very easy. Yes I might a good return on my CFD positions but they remain high risk investments and I do not want to risk my financial future to greed. Greed goes before fall. I rather take my time and know that I will reach my goal then risk it all to get there sooner. Slow and steady wins the raise.