Part 6 - What are the risks/disciplines/downsides?
Some financial commentators and regulators have expressed concern about the way that CFDs are marketed at new and inexperienced traders by the CFD providers.
In particular, the way that the potential gains are advertised in a way that may not fully explain the risks involved.
In response, financial regulators that cover CFDs now specify that risk warnings must be prominently displayed on all advertising, websites and when new accounts are opened.
CFDs suit a more aggressive investor who is prepared to take a greater degree of risk and accept greater volatility. What you must always remember when trading via a CFD is that gearing will dramatically magnify the possible gains, as well as the losses - as many will have seen in the past 12 months. The biggest trap is over-committing by borrowing too much, being too aggressive and then not being able to fund or finance the debt.
Some of the criticism surrounding CFD trading is connected with the CFD providers' unwillingness to inform their users about the psychology involved in this kind of high-risk trading. Factors such as the fear of losing often translates into neutral or losing positions when the users change from a demo account to a real one - a fact that CFD providers tend not to document.
Inexperienced CFD traders also tend to make bad trading decisions. Successful traders have a particular trading method or style which serves them well, but the impulse trade that is often executed by those who leap into CFD trading without proper training, invariably leads to losses.
Geared products like CFDs can help you make the most effective use of your investment capital, but it is important to appreciate that the amount you could lose relative to your initial investment is greater for geared products than for non-geared products.
Trading CFDs is a flexible way to take a position on the financial markets but without an effective risk-management strategy, it could very quickly lead to losses. It is therefore vital to understand risk and learn how to manage your portfolio effectively.
- Trading and Investing Strategies
- Edmond Jackson's investing master class
- How to trade CFDs
- How to trade forex
- Value investing for beginners