If you want to be a professional trader, chances are you aren’t going to limit yourself to a single form of investment. That’s just basic diversification, and it’s the basis of managing risk in a portfolio. The thought is that if one form of investment should suffer a critical hit, like the sudden collapse of a specific market, the investor will be somewhat insulated by having invested in other markets which remain robust.
It’s also important to diversify in more complex ways. While it helps to simply be invested in multiple different kinds of investment, it also makes a lot of sense to invest in kinds that have different characteristics requiring time and personal involvement. To illustrate this, I’m going to break down the pros and cons of ETFs, related to a popular form of day trading known as CFD. Before I get into the list, I’m going to explain CFD for those of you who are unfamiliar.
CFD through CMC Markets is a kind of day trading which is based upon the value behaviors of financial products all around the world. These may be markets, individual assets, stocks, and the like. You’ll have the opportunity to buy units that represent shares in the underlying asset. You won’t actually own the asset itself, just rights to profit from correctly guessing it’s value in the near future.
You’ll make an investment, then buy up as many units as you care to carry. Then you just have to make a speculation about which way you think the value will go, then wait for the time to run out. If the value has changed in the way that you anticipated when the clock runs out, you’ll get dividends based on how much the value moved in the direction of your choosing, as well as how much you had invested in that single asset. If you get it wrong you lose money by the same proportion. That’s basically it. Here’s why I advocate for CFD as a companion investment to ETFs.
ETF PROS – ETFs are inexpensive and present only moderate risk to the investor. Well-chosen, they insulate the investor from any problems related to specific stocks, instead benefiting from the overall momentum of entire markets.
ETF CONS – ETFs take many years, even decades, to mature and give an investor enough money on which to retire. There’s also little involvement from the investor. Some people may see this as a PRO, but without involvement there’s little learning and it’s possible for interest to wane.
CFD PROS – CFD requires very active involvement from the investor. There is great potential for fast growth, and the learning that occurs follows similar patterns.
CFD CONS – CFD is very risky. You can lose money just as fast as you can gain it.
As you can see, these two investment forms almost cancel each other out in terms of PROS and CONS. As such, I think they are a really good thing for serious investors to research, making good bedfellows in a single portfolio. By mastering both, you can profit in the short and long term, while insulating high risk with low.