The contract for difference is a product that is highly leveraged and complex, which is preferably suited to those who are very experienced in trading and investing. CFDs can be very profitable and can provide opportunities to quickly earn a lot of money, but you can just as quickly lose a lot as well if you are not experienced.
CFDs let the traders speculate on the price movements of a wide variety of assets and financial products – anything from currency pairs to share prices to the oil or gold price. The traders don’t own the asset, not even trading the assets themselves, but instead, they only speculate whether the price will rise or fall.
Trading CFDs can be appealing since you have the possibility to quickly make a lot of money. CFDs are extremely leveraged, so even if you only have to put a small margin to start trading, still, you will be able to profit from 100% of the possible gains. Thus, many risks are also involved, which are listed below.
CFDs are Complex
These products are complex thus there is always room for errors. While making investments in shares is a technique fit for both new and experienced traders, CFDs are still the best fit for experienced ones.
Your Loss Can Be Greater Than Your Starting Capital
With CFD trading, you must keep in mind that you could lose more than the amount of your initial capital invested. It has more risks compared to traditional trading of shares because you are trading with leverage.
CFDs Are Contracts
Remember that in trading CFD, you are purchasing a contract or agreement between you and the provider. The contract will outline your speculation on the price of the product or asset and is officially binding. You can get stung by hidden clauses unless you have some knowledge about trading as well as the time and patience to grasp the contracts’ provisions.
CFD Providers May Not Work on Your Best Interest
This is what we call a counterparty risk. For instance, there may be delays between you placing an order and the provider executing it. This could mean that your order is performed at a worse, costing you much more. If your trade is losing, your provider may close it without making consultation with you. Your right speculations and assumptions may lead you to success, but you must also consider the factor of having a good CFD provider.
Your Money May Be Held with The Money of Other Traders
Every provider of CFD has their personal T&Cs, but generally, your money is covered by law against misusing your funds by CFD providers. Some may pool your investment into an account mixed with other investors’ money. By then, they are already allowed by the law to withdraw some in the form of an initial margin.
CFDs Are Affected by Conditions Of the Market
Since you are speculating on the movement of financial assets, your trade will be disturbed by the market conditions. Yet, since CFDs are very leveraged, even a tiny fall on the market can cost you a tiny loss.
CFDs Can Move Very Quickly
It is referred to as gapping and is referred to as the idea that CFDs can move in between prices without having to stop in between any price points.