The first consideration when using CFDs is that even though they were designed to simplify trading, they can be very complex instruments and can cause problems for new investors if they’re not adequately understood. Therefore, it’s essential to go through all the risks involved before trading. If you’re trading with a provider that wants to invest your money for you, then it’s worth checking their track record of achieving returns on their capital, rather than just looking at the quoted profits.
The risk of unreliable brokers
There are various further risks associated with CFDs – some of which can be extremely serious if they arise – so it’s wise to protect yourself by finding out what these are before setting up any transaction.
For example, even though there is no need for collateral in CFD trading, brokers may insist that you deposit more cash than you want to trade to cover unpredictable market movements. This means that if market conditions turn against you, then the broker has already secured his money and won’t feel any need to help you out. You should also be aware that CFD trading is very different from investing, so if you’re using it as a way of getting started in trading, you should be prepared for some dramatic ups and downs before you get the hang of things.
The risk of emotional trading
Your first step when assessing whether or not to trade via CFDs should always be to go through all the risks involved with that provider or strategy. It will help you make an informed decision about how much risk to take on without feeling any pressure from your broker (for example) to take additional risks.
Letting your emotions drive your trading is one of the most common mistakes made by people who trade CFDs. It’s easy to see why: since there is no need for collateral when trading via a CFD, many new investors initially feel that they can afford to take on more risk than they really should. The problem with this approach is that you could still lose all your money if the market turns against you, which means that it’s important not to think of CFD trading as something like playing poker where it doesn’t matter if you lose because you only put in what you’re willing to put at risk.
Trading via CFDs is much more like investing – once you’ve lost all your original investment, then there’s no prospect of any other returns.
The risk of uninformed trading
It’s important to remember that CFDs are complex investments, so it takes time to develop your understanding before setting out on any trading activities. If you don’t have the time for this (or prefer to keep things simple), there is nothing wrong with investing in shares instead, even if they aren’t as convenient to trade via an online broker.
However, when using publicly quoted prices, you will be able to check the current market value of any company whose shares you’re interested in. It isn’t available when entering into transactions through a CFD broker because these only deal with contracts that represent future assets rather than anything that’s changing hands at present. So when deciding whether or not CFDs are worth exploring further, you should also consider how convenient it would be for you to buy and sell shares rather than entering into a CFD transaction.
If you’d like to find out more about trading via CFDs, then try doing some research online – for example, by going through the articles at Investopedia’s CFD Trading University. There are also many other valuable resources available that you can use to get started with this type of investing, including educational videos on sites like YouTube.