CFD primarily allows a trader to exchange the difference in the values of a financial product between the time that the contract opens and closes without owning the actual underlying security. While CFD’s may be attractive to day traders they are quite risky due to several reasons including industry regulation, lack of liquidity and the constant need to maintain an adequate margin as a result of many leveraged losses.
Counter-Party Risks
The counter-party in this case is the company that provides the asset in a financial transaction. Whenever you’re buying or selling a CFD you’re buying an asset which is in the form of a contract issued by the CFD trader. This further exposes the CFD traders to other counter parties which increases the risk of the counter-party failing to fulfil the financial obligations. If your CFD trader is unable to meet the obligations then the value of the asset is completely irrelevant. Since the CFD industry is unregulated there are several risks to trading and you can easily be scammed if you don’t do your research properly.
Market Risks
Since the CFD industry relies on speculation of the value of an asset by investors which can be proven wrong in many cases the industry is quite risky. The investors will choose a long position if they believe the asset's value will rise and the short position if they think the value of the asset will fall. Unexpected information related to the market and changes in market conditions and other government regulations will result in sudden changes. This exposes you to market risks and if the value decreases you’ll suffer a loss.
Client money risks
Many countries where CFD trading is legal, several client money protection laws exist to protect all investors from harmful and fraudulent practices of the CFD traders. Under legal obligations the money transferred to the CFD broker will be segregated from the investors money to prevent investors from hedging their own funds. However, there’s a loophole to this which is that the law does not prohibit the client’s money from being pooled into other accounts.
Liquidity risks and gapping
The market conditions affect several types of financial transactions and it increases the risk of the loss. If there are insufficient trades being made in the market for an asset then your existing contract can easily become illiquid. This allows the CFD provider to require additional margin payments and even close the contract at lower prices.
Since this industry is incredibly dynamic the price and value of the asset can fall before your trade is even agreed upon at a previous price. This is known as gapping and it results in losses for the investor/ customer.
Use Chargebackway if you’ve been a victim of CFD fraud.
