What are the Risks of Contracts for Differences Trading?

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CFD trading in UAE countries is popular. However, CFD trading carries significant risks that you should know before engaging in CFD trading.

 

– CFDs are derivatives and carry risks, which can cause high losses

– They leverage CFD products and carry risk; ‘gearing’ does not eliminate any risk.

 

What are CFDs?

Contracts for Differences (CFDs), also known as equity index CFDs or equity CFDs, allow you, traders, to trade in financial markets by taking advantage of fluctuations in prices without owning the underlying asset outright. This enables them to make money when the price fluctuates upwards or downwards.

 

However, investors need to understand that CFD traders are derivative instruments derived from an underlying asset – say shares, indices or commodities. CFDs are financial contracts between two parties – the buyer and the seller. CFDs allow investors to speculate on an asset’s price without owning it. CFDs differ from options, futures and other derivatives because they are unique in that they can trade them through a broker, which is why CFD trading has become increasingly popular over recent years.

 

The risk associated with CFDs

A market risk inherent in CFD trading is that you cannot control CFD prices during intraday trading. Although brokers must carry out ‘mark-to-market’ daily margin calculations for clients, your profits and losses will vary according to fluctuations in CFD prices.

The second significant factor with CFD trading is that there is no initial outlay required to hold CFDs, which means CFD traders can use leverage to maximise their positions. CFDs are available in almost all tradable markets – both financial markets and foreign exchange. CFD brokers offer different leverage ratios but usually range between 10:1 and 25:1.

 

CFD brokers allow you to trade CFDs on the price movements of shares, indices, commodities, ETFs (Exchange-Traded Funds), fixed income products, currencies, cryptocurrencies, and active coin managed accounts. CFD trading allows investors to gain exposure to many investment vehicles without owning or transferring them. This gives CFDs the potential for significant profit and potentially high losses if there is an adverse movement in underlying prices.

 

CFD trading in the UAE is big business – but you should approach it with caution as you cannot control what happens to CFD prices during intraday trading. Although brokers must carry out ‘mark-to-market’ daily margin calculations for clients, your profits and losses will vary according to fluctuations in CFD prices. The second significant factor with CFD trading is that there is no initial outlay required to hold CFDs, which means CFD traders can use leverage to maximise their positions.

 

Availability of CFDs

CFDs are available in almost all tradable markets – both financial markets and foreign exchange. CFD brokers offer different leverage ratios but usually range between 10:1 and 25:1. CFD trading allows investors to gain exposure to many investment vehicles without owning or transferring them. This gives CFDs the potential for significant profit and potentially high losses if there is an adverse movement in underlying prices [-by IG Markets (UAE)] What are CFDs?

 

A contract for difference – a ‘CFD’ – is a contract that reflects the relationship between an asset’s value and its price without actually referring to the asset itself. It’s what enables you to trade equity index CFDs, commodities, CFDs and cryptocurrency CFDs – all without owning the underlying asset. CFDs are a contract between two parties – you as the client and your broker. CFD trading is big business in the UAE and worldwide, but they should approach it with caution, as you cannot control what happens to CFD prices during intraday trading.

 

Although brokers must carry out ‘mark-to-market’ daily margin calculations for clients, your profits and losses will vary according to fluctuations in CFD prices. The second significant factor with CFD trading is that there is no initial outlay required to hold CFDs, which means CFD traders can use leverage to maximise their positions.