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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.

Broker support

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.

Bottom line

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.

Binary options are often referred to as scams. As financial instruments that has more in common with casino games than they do with stocks and other investments. Many will tell you that it is impossible to earn any money from binary options and that they are designed to make sure that you always lose money. That no one who knows better would ever trade with them. Me myself recommend that people avoid them. Despite all this I trade with them regularly. In this post I am going to explain why this is. Why I trade with a financial instrument with an awful reputation. A financial instrument that I discourage others from trading with. You can read more about my investment strategies here and my investment goals, here.

The bad reputation

Lets starts by looking at why binary options have a poor reputation, why they are often referred to as scams.

Poor knowledge

People have a lot of misconceptions about binary options and a lot of traders start trading without really understanding the answer to the question “how do binary options work?“. All information about how binary options work are freely available on numerous websites. Most brokers provide detailed information about how the options work. It is very easy to learn how binary options work if you want to do so. A lot of traders are unfortunately too lazy to read the information provided and just assume that they understand how everything works. They assume that binary options work the same way as regular options. This is not the case.

Traders start trading with these options without understanding how to use them effectively. Without understanding that you need to be a skilled trader to make money. Unskilled traders will lose money and all new traders should always use their demo account to train until they become skilled traders. Binary options brokers make their money from the large quantity of unskilled traders that starts trading with real money before they are ready. Traders who in their hubris thinks that they are skilled enough to make money without ever taking the time to learn if they really are.

Misleading advertising

Binary options have been advertised very aggressively and it is very common that the advertisement make it seem easier than it actually is to earn money from binary options. The ads make it seems like anyone can start trading with binary options and earn large profits. This is technically true, anyone can make money if luck is on their side, but it disregards that fact that most unskilled traders will lose money. You need to be skilled to be able to make money from binary options. Most people who see the ads and think that binary options are going to make them rich will lose a lot of money.

Binary options might not be a scam but it is fair to say that a lot of the ads are dishonest.

The adds make people think that it easier to make money than it is.

Passing the blame

Traders who have been too lazy to do their research or that has fallen for the misleading ads that make it seems easier to make money than it really is will often feel scammed. Claim that binary options are a scam. It is easier to pass the blame on to someone else than to admit that they where too lazy to learn how the options really works. Too stupid to remains skeptic to the ads and find out the truth before they started trading with binary options. All the information they need to make an informed decision is freely available and easily accessible through google or on the brokers website.

Impossible to make money

It is not true that it is impossible to make money from binary options. A lot of people are making good money from binary options and me myself make modest profits from the trade each month. I would be able to earn more if I was able to devote more time to the trade. If I was willing to devote the time necessary to become a truly skilled trader.

It is true that each option is design to make the broker money. You lose all your money if your option matures outside the money but you earn a lot less (70-90%) when an option matures in the money. The broker has an edge on each option. If you were forced to buy random options than it would be impossible to earn money. But you are not forced to buy random options. You are allowed to pick and buy exactly the options you want to buy. This gives you the edge to earn money. If you are skilled at picking options that matures in the money then you will earn money.

Why I trade with them

The simple answer to this questions is that they allow me to make money. They allow me to get a good return on invested capital with minimal effort.

The more complex answer is that binary options can be used to hedge other investment such as FOREX or CFD positions. This allow me to reduce the risk of certain high risk trades. In some cases I am able to completely eliminate the downside of certain positions. I am hoping to address this topic in a more in depth post at a later date.