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CFD TRADING RISKS

Please find below more information CFD Trading Risks. Just click on the links to get more information.

        

Risk Exposure on CFDs Trading

You may be thinking about investing your money by entering the CFDs trading market. CFDs are derivatives, so investors are not required to pay stamp duty. They provide the chance to get reasonably high returns over a time period usually of a few months.

But before you begin CFD trading, there are factors you are urged to consider. There are many reasons why the value of your investment could be affected. For example, changes in foreign exchange rates, or the volume of the marketplace. What you have achieved before with a CFD, and what your projected aims are may not actually take place in the future. Put very simply, things can change sharply and suddenly and you can end up making significant losses on trading.

Am I Suitable for CFD's?

Not every investor suits CFDs. One main element to take on board is that you need to know your product - be aware of the risk exposure.

It has been said that people think they can enter trading CFDs without prior knowledge and that anyone can become a successful trader. The second part of that sentence may be true, but you need to research the subject - instruments, products and risks need to be understood. Treat it as you might a full time profession where you need to know what you are doing in order to be a success! You could save yourself thousands of pounds by doing the background work.

How Large is my Risk Exposure?

Risks are far higher with CFDs than those associated with regular or traditional shares trading. There is a possibility that you will not get back the money you initially invested - and you may end up needing to make additional payments.

The risk to the CFD trader is far greater than to the ordinary share dealer. Margin trading means that relatively small changes in the underlying shares can mean huge wins - or disastrous losses.

Am I Legally Liable?

Yes. If you are unable to pay funds in time in the case of a loss, the trader is usually legally liable to make up the deficit to the broker. That is why it is wise not to take too large a position, as the trader may be subject to large margin calls, and without much notice due to sudden price moves in volatile markets.

Could I Lose All Funds on my Account?

As a CFD trader, you will be required to pay a deposit of a percentage of the total trade value - the initial margin. The price movement on the total trade value affects the outcome. Therefore, a loss on the contract could exceed the initial margin, so you may be required to pay the broker additional funds.

Your could lose more than the balance on your account. Margin trading means that you are controlling a much larger position than your deposit. You could lose the amount on your account and be required to pay outstanding balances to your broker.

Here are more risk factors:

OVERTRADING

Overtrading means the investor trades too often, due to a number of reasons. For example, he or she may be trying to regain losses by placing more trades - this is also known as 'revenge trading'. The investor may also be feeling flush after consecutive wins and will become overconfident - or even be addicted to trading. Another, perhaps surprising factor often mentioned is boredom. The investor is trading too often out of boredom, and being able to access their trades with ease online means anytime can become trading time.

It is widely reported that the psychological damage done through overtrading is worse than the soaring costs. Ultimately, the investor can end up in a deep hole through overtrading and will be unlikely to gain much profit. It is in fact more likely that he or she loses out much more than they win.

RUSHING IN HEAD FIRST

Over-confidence is a sizeable problem with CFDs trading. New traders, especially, can get too excited if they have a series of wins. It is a known warning amongst traders that newcomers who have large, quick wins can head for disaster.

Let us say you have made a healthy profit on one trade - say 3% on one trade which made you 500. You might think, this is working - I'll put more capital on the next trade and I'll make twice that amount. The next time you trade, it fails. You lose out on what you have just won and are left desperately trying to think of ways to regain profits. This is extremely common. Therefore, it is best to take your time, and not to get too attracted by what may seem like a foolproof plan.

STAY WITHING YOUR MEANS

As you will know by now, CFD trading means you are at risk of significant losses. Overnight, the market can change and move against your position, say by 10 per cent - if you started with 5,000 of trading capital, your position now stands to lose 10,000. So now your original 5,000 is lost and you owe your broker 5,000.....it isn't a situation you want to find yourself in. Therefore, it is vital that you trade within your means. Don't gamble money you don't have - only speculate with money you can afford to lose.

Important Note:

Which Way To Pay is an independent online comparison website. Please be aware that while part of our website content involves the review and comparison of a wide range of financial products, we do not in any way recommend or encourage consumers to begin a CFD transaction or to enter trade on any index, commodity, currency, stock or share. Please ensure you that are fully aware of the product before you begin transactions on CFDs trading.

Which Way To Pay, while using reasonable measures to ensure that data on the website is accurate, is not aware of your personal investment aims, objectives or needs. Site content is designed for information and interest only.

We would encourage that if you are unsure as to your suitability for CFDs trading, you seek independent financial advice.

The risks outlined here have been just some of those involved in CFDs trading. While there are many positive sides to this type of trading, it is nevertheless important to realise what the risks are when dealing with such an exciting and potentially rewarding financial product. Once you are prepared it is up to you whether you employ CFDs sensibly or without care or forethought.

        


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