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What are the risks of getting into CFDs?

What are the risks of getting into CFDs?

CFD Trading is definitely a great and quick way in investing your hard earned money in a very fast paced manner. A lot of traders prefer getting into this form of financial trading market due to certain advantages as compared to forex trading. As much as it sounds like a lucrative situation you would want to get into, CFD trading has its own risks, just like any other financial trading market. We have gathered some of the things you should look out for when getting into it and hopefully not to discourage you as a potential trader but more to educate to make well informed market decisions

What is CFD?

CFDs  or Contract For Difference, allows a trader to project on the movements of a large range of financial assets which covers everything  from indices to currency pairs to the price of oil. A lot of CFD traders get into this form of investment mainly because you do not need to own the underlying asset nor are they trading the asset itself which cuts a lot of delays and are instead based on whether its value will increase or decrease. 

Are there any risks involved in CFD trading?

Just like any form of trading that involves markets, there are a few risks that you will need to consider and take note of in order to ensure yourself of the possibility of having great returns of your investment

Losing more than what you have initially invested

With simple casino bets,when you bet your $50 on a table what is initially understood is, if you lose this bet you will only lose the $50. However, it gets a little more complex with CFD trading as there is a possibility of losing more than you have initially put in your account. This is mainly due to the CFD trading having leverages. In CFD, traders are only asked to put a small amount of the total trade value, usually at 5% and if your trade goes well, you are entitled to 100% of the gains. Of course, with that being said, it can also happen in reverse. When you lose, you are responsible for the whole 100% loss as well. Having a solid trading plan is key as it helps you control the type of trades you will get into and projecting the risks involved and potential losses that it may incur. 

CFDs are affected by Market conditions

As you analyze the movements of financial assets in the market, such as currencies, your trades are going to be affected by market conditions but given that CFD trading is highly leveraged, even a tiny fluctuation in the market can incur big losses that you have never initially expected. This is even more the case when you continue trading during times of economic uncertainties or government elections as this bears heavy effects in the market. Despite certain times in your trade that things may seem stable, there are still some unpredictable and random events that will affect the price movements that no analytics can figure out for you during your trades.

CFDs move too quickly

Also known as  ‘gapping’ and pertains to the situation that a CFD can quickly move in prices without even stopping at any of the price points in between. So even if there are certain trades where you planned to close at a certain price, you might not be able to achieve it due to the prices moving so quickly. Sometimes despite evenly planning out your trades, there will always be situations that are very leftfield and as a young trader, should be recognized and understood that such situations are part of the game.

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