The Contract of Difference, abbreviated as CFD, originated in London, England in 1980s. Similar to NDF (non-deliverable forward foreign exchange transaction), it is the difference between the future value and the present value of an asset, which is a transaction between two parties. The two parties to the transaction do not deliver the physical assets, but only the price difference, and the delivery can be made in multiple currencies. Trading products can be commodities, stocks, foreign exchange, indexes, etc. Traders can use leverage to speculate in both long and short directions without actually owning such assets.
At present, CFD transactions are legally traded in Canada, Germany, Britain, Switzerland, Japan and other countries, but in the United States, with the prevalence of deleveraging after the 2008 financial crisis, CFD transactions are banned because of "high leverage". Although the China government has not yet opened this trading form, many retail investors in the market have been attracted by the advantages of this product. The trading of contracts for differences looks very attractive. What risks do investors face? In this paper, ForexPress collects and sorts out several common risks in order to inspire investors.
Regulatory risk
This is also the biggest risk of CFD trading. Because it is an over-the-counter transaction, we need to be very cautious in the choice of counterparties, that is, market makers. At present, in addition to industry self-regulation, all countries have corresponding regulatory authorities to supervise, such as FCA in Britain, ASIC in Australia and financial office in Japan. Therefore, when choosing a market maker, you must choose a dealer with sufficient capital registered and supervised by various regulatory authorities. This also provides experience for China's financial product innovation. Any financial product innovation must be supervised by strict supervision departments, and at the same time, the autonomy of the industry can be maintained through industry self-regulatory associations to avoid excessive supervision and delay development. Market Risk When you enter this market, you will inevitably face this risk. As a more speculative trading product, risk is directly proportional to income. In the market risk, it is mainly brought by the fluctuation of interest rate, exchange rate, stock price and commodity price, and these market risks are uncontrollable for investors, so investors should try their best to identify risks and control the proportion of positions to control the spread of risks.
operating risk
Because CFD is an over-the-counter transaction, online electronic transactions are generally used, investors must pay attention to the following risks: the network conditions of both parties to the transaction, because CFD trading products such as foreign exchange and commodities are all traded 24 hours a day, and problems with the network conditions of either party will bring risks to the transaction; The risks brought by operators under special circumstances, although the trading platform software is developed, but in the face of special events, as market makers, in order to avoid their own risks, they will take artificially controlled transactions. For example, the non-farm employment data released on Friday of each month will bring huge fluctuations to the foreign exchange market and commodity market, or sudden emergencies in a country will cause huge fluctuations to the country's stock index. At this time, the operators of market makers often take measures that are beneficial to themselves and unfavorable to investors.
policy risk
Due to the "highly leveraged" nature of this trading product, there are different policy restrictions in different countries, so when trading with market makers in different countries, it is necessary to consider the policies of different countries.