Risks of CFD trading

When entering a market you should always get insights of the reasons causing this market to move in one or another direction. With CFD Trading you can take a position almost on every market in the world, but one of the greatest risks is to bet on something you don’t fully understand. Moreover, you should be familiar with the specifics of those financial products in general.

CFDs follow the price of a share or other asset as there is some difference which covers your broker’s costs. Usually share prices follow the country index price as spiky movement are possible resulting from major news related to that particular stock. In those circumstances you can hardly be sure what will happen with your position. If you are short on a CFD with underlying instrument which went down due to company bankrupt, your broker might take certain measures to protect its position with you. That is why you should always be aware of those terms in order to not get surprised at the time that happens.

Anyway, before entering the current market you should carefully research and seek independent advice if needed. Design your strategy, specify you enter and exit points and make sure you follow them. The major forces that move your CFD price must be identified and tracked at all times. In general the US markets have always been a major market mover so you should follow them as well.

Choose your sources of news and keep a close eye on them. Generally, avoid trading during major news releases unless your strategy involves news trading. If you go for that, be prepared to experience unexpected costs as a result of widen spread or slippage. In both cases you will barely achieve your goals or if you do, that will be lucky.

Besides of the risk of not knowing well the market you trade, a significant risk of not knowing the nature of CFDs exists. As with all investments products, you should make sure that you are well educated about the core characteristics. Here is a quick list of CFDs specifics:

What are CFDs:

• High Risk Products
• Leveraged instruments
• Derivative products which follow a price of an underlying asset
• Cost effective way of investing
• Affordable for retail investors

What CFDs are not:

• A quick Get-rich scheme
• Something that you should try even if you don’t fully understand
• Safe investments

Another important risk that you should take into account is that you take a position against your broker unlikely if you have bought the physical instrument on a stock exchange. The main difference is that a conflict of interest arises between you and your counter-party which is not necessarily a bad thing. However, in case of bankrupt your broker will not be able to pay you the reward, especially if it is under capitalized or simply a scam. You can eliminate that risk by choosing a well reputed and regulated CFD broker.

One of the strictest regulatory regimes is the one of the UK. Their financial regulator FSA is quite serious about clients’ funds protection as well as overall client experience. Apart from having your account protected against unexpected circumstances such as bankrupt, the FSA ensures proper communication in terms of misleading information and advertisement. Hence, you will be always equally informed about both advantages and disadvantages of an investment product thus helping you to take the right decision.

The last but not the least, you should consider the risk of leveraged products. It looks appealing to win hundred times of your investment, but there is an equal possibility of ruining your account completely. Create your trading strategy based on what you are ready to lose rather than what you are planning to win. If you are just eager for massive earnings you will lose everything.

Conclusion

Generally, it might be best to stick to CFDs based on markets that you know well rather than trading markets you don't fully understand. In all cases choose a well regulated broker, the best would be a company regulated by FSA UK. Finally, never underestimate the leverage and remember that it can work against you.