Risks to Consider When Trading CFDs

CFDs are inherently risky, as, in almost every case, the position you create by buying or selling will be a size far greater than the cash you have deposited to support the position.  This, however, is not the only risk.

Leverage: CFDs are highly leveraged, meaning that your total position value can be far greater than the value of the cash you have deposited with the CFD issuer.  Always assess your trade by the entire exposure rather than the amount of cash used (margin) to open the position.  If, for instance, $5,000 is used to gain exposure to $50,000 worth of XYZ Pty Ltd, factor in the possibility that if XYZ Pty Ltd files for bankruptcy tomorrow, you can potentially incur a loss of $50,000, far greater than the $5,000 that you have deposited to open the position.

Counterparty Risk: Unlike trading shares, where you become the beneficial owner of a share in a company, CFDs are contracts that you enter into with the CFD issuer.  If the CFD issuer breaks the law or becomes insolvent, there may be a chance that you, via the funds you have deposited and/or the profits from your trading, become an unsecured creditor of the CFD issuer.  Ensuring that you read and understand the CFD issuer’s Product Disclosure Statement, as well as making an informed decision regarding the financial stability and management of the CFD issuer, is essential.

Gapping or Market Illiquidity: Remember, especially with share CFDs, that you won’t always have total assurance that your exit price from a trade will be met with sufficient buying or selling (‘liquidity’) at that price to fill your order.  For instance, you might have bought 1000 XYZ Pty Ltd at $10.00 and placed a stop loss at $9.50.  If, however, XYZ Pty Ltd issues a severe profit warning after the market closes, the best available price when it reopens the next morning might be $5.00, meaning that your 5% stop loss has turned into a 50% loss.

Trading psychology: For clients using Rivkin advice products, such as The Rivkin Trading Report, falling into psychological trading traps will be less common.  If, however, you trade CFDs without strategic advice, you may experience some mistakes that are typical of beginner investors.  For more on this, please visit Rivkin Education > Stock Market Psychology at www.rivkin.com.au.