Risks of CFD Trading
What Are The Risks of CFD Trading?
CFD trading can be a highly profitable investment vehicle, however there are many risks involved and it is believed that around 70-80% of CFD traders lose money overall.
Given the risky nature of CFD trading, it is imperative that you understand the risks involved. Please do this before opening a trading account as your financial livelihood could be at serious risk.
CFD Trading Risks Explained;
1. CFDs are high-risk and complex trading products.
As stated above, most CFD traders lose money. Reportedly, around 70-80% lose money and so you need to be sure that trading CFDs are the right investment product for you. Trading CFDs definitely requires some prior experience and are not suitable for everyone.
2. Gapping due to extreme market volatility.
“Gapping” refers to the concept that a financial market can move from one price to another without stopping at any price in between. This is typically due to volatility in the financial markets. Volatility can be caused by economic announcements, company financial results, Government announcements (to name a few).
If market gapping occurs and you have an open trade, you might not be ‘stopped out’ at the level you requested and your trade may be executed at an unfavourable price, which could significantly increase your losses.
3. You can lose more money than you deposited.
With CFD trading, you only need to deposit a small amount of money onto your trading account in order to trade much larger position sizes. This is known as leveraged trading.
For example, say Bob wants to buy 2,000 contracts at $5 per contract. His total exposure will be $10,000. However, because he is trading on margin, he will only need to deposit, say 5% of the total value to open the trade. In this example, Bob would only need to deposit $500 onto his CFD account in order to open the above trade. Now say that there is extreme volatility in this particular market and the price plummets 20%. Bob may have lost $1,000 because of this market gap, however he only has $500 in his account. He would therefore owe the CFD broker an additional $500.
4. Unregulated CFD brokers.
Only ever trade with a regulated broker, i.e. ASIC in Australia or the FCA in the UK. Trading with a regulated broker affords you many benefits. The most important being that your broker will be closely monitored & scrutinised by the governing regulator. Therefore, the broker will need to act in accordance with local law and regulations, i.e. treat you fairly!
Compare Some Of The Leading CFD Brokers;
Leading
CFD Brokers
Who are they?
Standard Leverage
Regulation
Min. Deposit
Segregated Bank Accounts?
ASX Stock Commission
Australia 200 spread
Wall St 30 spread
AUD/USD spread
Spread Type
Trading Platform
Next Steps
Low-Cost
CFD Provider
200:1
SCB
$0
0.07% with $5 min.
0.9pts - FIXED
1pt - FIXED
0.6 pips - FIXED
Fixed
CloudTrade, MT4
Fast-Growing
CFD Broker
30:1 (AU)
ASIC, FCA
$100
No ASX stocks
1pt
From 1.6pts
From 0.5 pips
Fixed & Variable
cTrader or MT4/ MT5
World-Leading
CFD Broker
30:1 (AU)
ASIC, FCA, MAS
$100
0.08% with $5 min.
1pt
1.6pts
From 0.5 pips
Variable