The Risks of trading with CFDs – know the dangers
Here at CAPEX, we are committed to the safety of our traders’ investments – and place monumental emphasis on ensuring that the risks of trading with CFDs are well-communicated wherever possible.
In general, CFD trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading CFDs. There are some liquidity risks and margins you will need to maintain. If you cannot cover reductions in values, we at CAPEX retain the right to close your position, and you’ll have to meet the loss no matter what subsequently happens to the underlying asset.
Leverage risks expose you to greater potential profits but also greater potential losses too. Whilst we do provide stop-loss limits, they can’t guarantee you won’t suffer losses, especially if there’s a market closure or a sharp price movement. Execution risks also may occur due to lags in trades, so best to keep a close eye on your trades at all times.
Market risk
The main risk of trading CFDs is the market risk. As contract for difference trading is designed to pay the difference between the opening price and the closing price of the underlying asset, CFDs are traded on margin, so this amplifies risk and rewards via leverage.
For example, one of the ways we suggest you mitigate this risk is to make use of stop-loss orders. In the professional asset management industry, an investment vehicle’s portfolio will usually contain elements that offset the leverage inherent in CFDs when looking at the leverage of the overall portfolio.
In particular, the retention of cash holdings reduces the effective leverage of a portfolio: if an investment vehicle buys 100 shares for $10,000 in cash, this provides the same exposure to the shares as entering into a CFD for the same 100 shares with $500 of margin and retaining $9,500 as a cash reserve.
So it’s safe to say that the use of CFDs in this context does not necessarily imply an increased market exposure (and where there is increased market exposure, it will generally be less than the headline leverage of the CFD).
Liquidation risk
If prices move against an open CFD position, an additional variation margin is required to maintain the margin level. We at CAPEX may call upon the party to deposit additional sums to cover this, in what is known as a margin call. In fast-moving markets, margin calls may be at short notice. If funds are not provided in time, we may close/liquidate the positions at a loss for which the other party is liable.
Counterparty risk
Another dimension of CFD risk is counterparty risk; a factor in most over-the-counter (OTC) traded derivatives. Counterparty risk is associated with the financial stability or solvency of the counterparty to a contract. In the context of CFD contracts, if the counterparty to a contract fails to meet their financial obligations, the CFD may have little or no value regardless of the underlying instrument.
This means that you as the CFD trader could potentially incur severe losses, even if the underlying instrument moves in the desired direction. CAPEX, as your OTC CFD provider, is required to segregate client funds protecting client balances in event of company default, but in some [variable] instances, it might be inevitable that guarantees are broken.
Ultimately, the degree of counterparty risk is defined by the counterparty’s credit risk, including the clearing house if applicable. This risk is heightened due to the fact that custody is linked to the company or bank supplying the trading.
The bottom line: Advantages to this best CFD trading platform include lower margin requirements, easy access to global markets, no shorting or day trading rules, and little or no fees. However, high leverage will magnify losses as they occur, and having to pay a spread to enter and exit positions can be costly when large price movements do not occur. Indeed, the European Securities and Markets Authority (ESMA) has placed restrictions on CFDs to protect retail investors and we at CAPEX adhere strictly to these.
Conclusion – Everything you need under one roof
We are very confident that CAPEX is your go-to broker if you’re looking to expand your trading skills and knowledge of the financial markets – in a safe and secure environment.
Beginners will find a plethora of educational materials they need to start trading with CAPEX CFDs through the CAPEX Academy which is packed full of educational videos, tutorials and courses. Advanced traders will also appreciate the additional trading tools available via MetaTrader 5.
So in a nutshell, we at CAPEX can safely claim our main strengths are the extensive array of CFD instruments available for trading, low spreads and flexible leverage levels offered and an education-oriented mindset and philosophy. CAPEX really does go to great lengths to make markets accessible to a wider audience of investors.
