Trading CFD is one of the most lucrative forms of trading when done right. However, just like any form of trading, there are risks that are bound to occur that will lead you into massive losses when safety measures and caution is placed in your trading plan. Let us look into the different forms of risks involved with CFDs.
Trading CFD? What is that?
Contract for Difference or CFD trading is a form of trading that allows people to speculate on the movements of the value of an asset. It can be from Currency pairs to Share Prices or even oil. Trading CFD is very convenient as you do not own the underlying assets nor will you need to be trading the asset itself but instead you are speculating on the increase or decrease of its value.
What are the different risks of CFD trading?
Considered as the most appealing when it comes to its high potential of earning lots of money in a short amount of time, CFD is one of the most sought after due to its high leverages. As you put a small margin in your account for trading, you may already commence trading and the benefits will be past the amount that you have input.
However, there are different kinds of risks and here are some of them:
Trading CFDs is Complex
Trading CFD is very complex as you trade products that will need to have full understanding and trading errors is something that has no room in it. CFDs are usually considered for people who have the right amount of experience in trading or at least, has a full grasp of how it works.
Losing more capital than you intend
For example, if you have put in a bet for $100 in a slot machine, the maximum amount of money you will lose is also at $100. However, in trading CFD, you are possibly going to lose more than what you have initially invested/deposited. This form of trading is more risky compared to other forms of traditional trading given that CFDs would have leverages. With leverages, you are only required to initially put in a small amount of money versus the total trade value. This is usually at 5%. If this goes in your favor, you are entitled to receive 100% in profits. But when things go the other way around, you will need to settle the 100% loss that you have garnered.
When you are trading CFDs, you are technically purchasing a contract between the CFD provider and you. The contract specifies speculations about the value of the underlying asset and you are bound to the agreement legally.If you are not careful with the contracts and its details, due to the fact that you are not as experienced with them, you might find yourself in trouble with the clauses you have overlooked.
Affected by Market Conditions
Since you are speculating on the movements of the price of the assets, your trades are affected by different market conditions. But since your CFDs are leveraged, even the tiniest decrease in the market can lead to immense losses on your end especially during important times of economic
Situations and major political turmoil. And do not be fooled by this because even if there is some form of stability in the market, it can still change into a situation against your favor as this can still be affected by the smallest and randomest of events.