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What Are the Risks of CFD Trading?

May 31, 2012 | Comments: 0 | Views: 142

It is a fact that there are always risks in everything that we enter into even in the most secure financial platform. As a matter of fact, even in the simplest activity that we do in life, risks are inevitable. Hence, it only means to say that we have to live with them. However, it is not to say that we can already put our guard down since we cannot eliminate them at all. In contrary to that, what we actually need to do is to make sure that their impact to the things that we are doing is minimized. This is also applicable when we are engaged into contracts for difference or CFD trading.

With the foregoing, there are actually at least three (3) kinds of risk that we need to ponder on. These are about the market risks, the liquidation risk and the counterparty risk. We will explain these in the section hereunder for you to better understand them and to think of the appropriate strategies.

On the one hand, the market risk is considered as the most major risk when it comes to trading CFDs. This is because the contract is primarily designed in order to pay for the difference between the opening price as well as the closing price of a specific underlying asset. In that regard, we all know that this is being traded on margins while its leveraging effects significantly increase the risk present at hand. Also, margin rates are commonly small, which allow a trader to use small amount of money to hold large positions. This, alone, is a very great risk already. Nevertheless, there are some ways in order to mitigate this or minimize the impact of such factor. One of these is by using the stop loss order. This is like a protection for them so that they will not have unnecessary losses.

On the other hand, there are also some risks related to liquidation. This is because when the price moves against the open CFD position of the trader, there will be an additional variation margin that is required in order to maintain such margin requirement or level. In this regard, the CFD provider will call the trader to deposit such additional amounts required to cover such margin and this will be in short notice. So, if the funds were not deposited in time, the provider may choose to close or liquidate the position at a lost. This is the liability of the other party.

Thirdly, counterparty risk is another dimension related to CFD trading. This is a very common factor, most especially in over the counter or OTC traded derivatives. This is related to the solvency or the financial stability of the counterparty to uphold the contract.

CFDSpy.com is an online trading portal and education site, aimed at making it easier for traders to learn about CFD covering a broad base of different investment types and instruments, and its risks.

Source: EzineArticles
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