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Monday, February 8, 2016

CFD trading in Australia: The risks and dangers

Like any engagement or exchange in the financial world, CFD trading has its own inherent complexities and risks. It’s not a perfect product. It has its own kinks and special features that investors must need to know and manipulate. Here’s a brief list of the dangers of CFD trading in Australia, and in the rest of the world.

CFD trading prevents you from buying or trading an asset

Let’s make one thing clear: A CFD is only a binding contract between a trader and a CMC Market. This contract is the object that brings profit or loss as a result of rising or declining prices. Since it’s a contract, there’s a chance that the details in the document may not even reflect the real price of the asset.

Contract for difference
"Contracts for difference" are based on underlying asset prices

CFD trading in Australia may make a trader lose more than his deposit

As with any trade and exchange agreement, CFD trading in Australia can make one lose money, more than their initial deposit, if they don’t play their cards right. This is why it’s important to be careful and certain, to know the lay of the land and gather as much data and information as possible. This will ensure that every factor has been considered before engaging the CMC market.

CFD trading provides leverage that can hurt you

CFD Trading in Australia makes use of leverages. While this may mean that you only need to take care of a percentage of the total amount of an asset in order to make a claim on a position, this can be misleading. Typically, this gives CFD traders the misconception that they can make more deals, more than what they really have. This will lead to lots of losses and instability.

CFD risks a close out

CFD Trading in Australia also means that one’s account revaluation amount must be a few notches above the predetermined close out prices. Coupled with the risk of over trading and the losses that may come with it, CFD traders run the risk of closing out and losing all of their positions.

Dependence on counterparties

CFD Trading in Australia rests on counterparties that issues the contracts. The obligations of fulfilling those contracts rests on the counterparties. This is in itself a problem. Financial difficulties, human error and unforeseen circumstances may lead to complications on the contracts and may end up as a no deal for the trader.

Possible technical problems

A lot of CFD trading in Australia is done online. It relies on the stability of the networks, the online world and algorithms. There is always the possibility of a program failing to do its jobs or algorithms failing to deliver the job it was designed to do. Some of these may be noticed when it’s already too late. While the instances of these are small in numer, this remains a problem and a risk that may happen.

Before jumping onboard the CFD trading wagon, make sure you’re aware of the numerous risks and negative outcomes that may come out. This will assist you in better handle the situation should it every happen to you.

Image: CC0 US-PD; Flickr/Geralt