CFDs are in high demand

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The demand for CFDs has been rising for years. This is because even private small investors can trade these financial instruments with only a fraction of the required capital thanks to the leverage effect. The CFD trading volume in Germany increased by 58% to €1,579 billion from 2012 to 2018. The number of CFD accounts and transactions have also risen continuously, from 110,500 in 2015 to 196,800 in 2018.

Yet this development was not intended at all. CFDs were initially developed to hedge long-term trades in interbank trading should prices fall. Many brokers discovered the great potential behind CFDs and included them in their portfolios.

The leverage effect and its consequences

CFD trading involves a very high risk that can even lead to a complete loss. In the past, if a trader lost more than 100%, he was subject to a margin call. Traders had to make up the difference with fresh capital, they injected money. BaFin prohibits CFD trading with margin calls.

Since 8 May 2017, all positions are thus automatically closed as soon as the available capital can no longer cover the losses. In addition to this ban, some brokers have introduced further security systems to prevent a total loss in the first place.

Therefore, keep in mind: Contracts for difference are only suitable for very experienced traders! If you still want to invest in CFDs, you must first thoroughly familiarise yourself with how they work.

cfd trading

The advantages of CFD trading

    You can open buy and sell positions, and some brokers even allow you to open several positions for one asset.
    CFDs in metatrader are relatively cheap because there are no account management fees or commissions. Instead, the brokers finance themselves through the spreads, i.e. the difference between the buying and selling value.
    Thanks to the leverage effect, you only have to deposit a fraction of the underlying asset as collateral in order to benefit fully from its market development. In other words: little investment for a disproportionate profit.
    CFD trading offers access to many lucrative markets that would not be available to you via conventional (unleveraged) products.
    Many CFDs are not bound to the trading hours of the stock exchanges, as they are traded over the counter.
    Pricing is always transparent.

Note: Although trading CFDs has become safer for investors due to the prohibition of a margin call, it remains a high-risk business where you can lose your entire stake in a very short time.