Like in any method of trading and investing, contracts for difference or CFDs are not perfect. In other words, it does not always work positively in favor of the trader. Hence, there might be some times when a trader can gain so much profits while there are also unfortunate times that the change to earn is too aloof. Nevertheless, proper combination of skills, patience, courage and talent can minimize the change of being on the unfortunate side and increasing the possibility of earnings. It is in this regard that traders must know the risks associated with this form of trading in order to have a full understanding on what to do and otherwise.
Generally, some people say that trading markets on margin has the natural risk of magnifying both the profits and losses at the same time. Hence, what this means is that a trader can incur so much loss if the market goes against the position. However, it is a good thing that there is a solution for this, which is by placing a stop loss on the trade position.
On the other hand, another setback or danger of CFD trading is what people say on its suitability for long term investors. Well, this is because some would say that it is not suitable for them at all. This is due to the fact that opening a position for a long time increases the costs of holding the same. In this regard, it would be more beneficial to simply buy the underlying assets rather than this form of trading.
Further, in this trading method, an investor does have any rights to vote, most especially if the underlying assets are stocks or shares.
With the foregoing, the risks in CFD trading can, in fact, be in two (2) forms. These are the market risks while the other one is the liquidation risk.
Markets Risks of Contracts for Difference
On the one hand, one of the most common risks of trading these contracts is about the market risk. This is especially true if a trader does not have any exposure yet at all in the market. Nevertheless, even if a trader has been trading on the same market for a long period of time already, there are still some inherent market risks that players cannot just eradicate at all. These can be in the form of price fluctuations, movements in the supply and demand side and many more.
Liquidation Risks of Contracts for Difference
On the other hand, another risk of CFD trading is about the liquidation aspect. This is about the danger of having positions across accounts that brokers can liquidate at their demand. This happens when a trader faces a margin call in any of the trades.
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