Without a doubt, Contracts for Difference (CFD) offers very appealing advantages for traders such as higher leverage, global access of the market from a single platform, no fees but offers professional execution and so much more. But let’s just face it, CFD is very risky. CFDs are mostly connected to rate fluctuations which could result in losses at any time. The worst-case scenario is when an investor needs to take on their personal assets just to cover the losses brought by CFD Trading.
These disadvantages can somehow be prevented or lessened with a better understanding of the concept. If you are planning to open a CFD position, you might want to check these facts about the possible risks of trading CFD.
How to Manage Leverage Risk
For instance, you are planning to buy shares worth 10,000 francs. The best thing to do is to buy a 10% margin which is the same as buying the shares worth 10,000 francs. 10 to 1 should be used as a leverage ratio and invest just 1000 francs. Take note that when the leverage ratio is higher, you will pay less money as margin when opening a position. Using the ratio 10 to 1 will help you gain as much as 10 times the value of your invested money.
How to Manage Debt Risk
Making real profits is as thrilling as it may sound, BUT, the thrill and excitement can simply turn into a complete nightmare in case the leverage effect turns its back on you. Even a small market loss can create a huge capital investment loss. The worst thing that can happen is when your loss outsmarts your deposits. In this case, you will have to use your personal money to change and make a difference.
If you happen to leave your positions in CFD open throughout the night or through the weekend, you might encounter something nasty. You may lose a huge sum of money if the rates go down overnight. To avoid this, choose a bank that closes automatically whenever your losses outweigh your margin.
How to Manage Counterparty Risk
The counterparty of a regulated trading environment always goes to the stock exchange. This risk comes in when you invest in a CFD trading that’s poorly regulated. There are a lot of brokers online and they are not all bad. It’s just that there are some bad apples among them. Never join them since they put you at risk of bankruptcy.
If your broker encounters bankruptcy, you as an investor will lose your entire CFD investment. This is the reason why you need to conduct proper research and comparison before you choose the best CFD broker to hand on your investment.
There are a couple of banks as well as brokers that offer risk minimization for investors. This is good risk management as they put a limit on the investor’s leverage ratios. If things turn sour, the only thing that you will lose is the capital that you invested in your margin. Excellent CFD brokers also offer additional controls like limit orders and stop orders.