Why Trade CFDs

The size of the CFD market has grown rapidly in recent years, driven by intensive marketing by CFD issuers, including extensive advertising in the financial and general press (on television, in print, and online) and via seminars. Investors are attracted to CFDs because of the leveraged opportunities they offer, the low initial capital required to commence trading and the perceived ease of trading.

While it is true that CFDs offer a leveraged opportunities and low initial capital is required; the true is, that trading CFDs is not for everyone and it requires more effort, dedication and education than trading equities or other financial instruments. High percentage of traders end up breaking even or losing capital faster than if they were investing on traditional equities.

The Australian Security & Investment Commission released a report on 2010 that will give CFDs investor a good perspective on CFDs trading. This report summarizes the results of a ‘health check’, conducted by ASIC in 2009, on the contracts for difference (CFD) market in Australia. It provides a review of CFD issuer business models, market dynamics, advertising, disclosure documents, investor attitudes and behaviour and investor complaints data.

It is highly recommended not matter where your main market is to have a thorough reading of this document and then decide if you are ready for the challenge of trading CFDs.

Below are a couple of snapshot from the ASIC document. “Expectations of CFDs versus trading experience” and  “Suitable CFD investors (as described by respondents)”

Why Trade CFDs Benefits vs Risk

Benefits Risks
Long /Short can trade the market in any direction for any period of time except for bond and commodities. Always check with provider prior to open a position.

Leverage allow to invest, borrowing money at low cost.

Smaller Margin or cash amount required to open any position.

Stop Loss most CFDs provider have compulsory stop loss in place. Stop loss are adjustable

Small fees and overnight funding interest charge or paid to your account if you have a short position open.

Hedging your existing portfolio of shares.

Global market access

Leverage is great but if you over leverage yourself you could be in serious trouble.Margin Calls if the market move against your position and you don’t have enough funds to cover your losses your account will go into margin call.If you fail to act with urgency by depositing more cash or closing your position, your CFD provider will close your position.

No ownership You do not own, or have any interest in, the underlying assets.

Significant Counterparty Risks (i.e. the risk that the issuer or another party fails to meet their obligations to the investor)

Gapping’ that can result from time delays between the placement and execution of trader orders

Expectations of CFDs versus trading experience

asic_expectations

Suitable CFD investors (as described by respondents)

asic_suited_investors

7 Reasons to Trade CFDs Infographic

7 Reasons To Trade CFDs Infographic

7 Reasons To Trade CFDs Infographic

Related Documents

Contracts for difference and retail investors

Improving disclosure for retail investors

Risk warning: Your capital may be at risk. CFD trading is suitable for experienced traders and not beginners.