CFDs have gained popularity as a form of online trading. Although some people prefer other forms of online trading, CFD trading has a reasonably straightforward process. CFD is an agreement between investors and the trading platform, stating the investor has to pay the difference in buying and selling prices of the asset. The credibility of CFD trading is doubted due to certain risks attached to it. But this article will tell you all you need to know about the risks involved in CFD trading.
CFDs have many advantages, such as a wide variety of trading assets and higher leverage than traditional trading. But it also has disadvantages, such as weak industry regulation and traders having to pay the difference in buying and selling prices of the asset. However, the most damaging downside of CFD trading is its risks.
4 CFD Trading Risks You Must Be Aware of
1. Counterparty Risk
The counterparty provides the trading assets, and the CFD contract is given by the CFD provider. However, this contract allows the trader access to information of other traders and counterparties associated with the CFD provider. This exposes the information of different parties involved in the trade, making it unsafe.
2. Market Risk
The trader speculates the market prices, whether the asset’s value would increase or decrease, and chooses to buy or sell based on those speculations. However, external factors can influence the market, such as new information, which can affect the asset’s value. The trader has to meet margins set by the provider; otherwise, the trader will have to sell at a loss, or their account may be closed.
3. Liquidity Risks, Market Volatility and Gapping
The CFD contract can lose its liquidity if there is a lack of trades regarding the concerned asset, allowing the contract provider to request margin payments. Moreover, money markets have high volatility, i.e., they change rapidly and lead to gapping – the value of your CFD rising or falling before you can trade. Thus, the trader earns lower profits and pays any losses suffered by the CFD provider.
4. High Leveraged CFDs
CFDs offer high leverage, but this also implies higher risk. If you can make a big profit by the market changes in your favor, you could suffer an equally significant loss if the market moves against your predictions. The market for online trading is highly volatile; hence, it is essential to remember that all risks cannot be avoided, and there may be financial losses in trading.
Nevertheless, Here’s A Way To Avoid These Risks in The Safest Way Possible!
- Use stop-loss order to minimize the impact of market volatility
- Monitor your account to stay within set margins and prevent account closure
- Research CFD trading platforms using third-party companies
- Fundstrace is a firm that can help you find verified CFD trading platforms or CFD contract providers. The company primarily focuses on recovering funds lost to various scams, but you can ask for information on trustworthy trading platforms and report CFD frauds to them.