Trading Contracts for Difference

You’ll often see advertisements for courses teaching you how to make a bucket load of money through trading. Trading in Contracts for Difference (CFDs) are one such investment product that have been regularly advertised in recent years.

These publicly-targeted course always concern me and they also concern the regulator, ASIC. ASIC are so concerned they’ve published a very useful guide to trading CFDs.

I am concerned because I see that our human nature ticks us into focusing on the glamorous headlines of potential returns whilst blinding us to the complexity of the strategies and products. They require a great deal of expertise to make the potential high returns, plus they come with higher risk. Many people don’t fully grasp that.

In publishing the guide ASIC Commissioner, Greg Medcraft, said: “Our research with CFD traders found that many traders don’t know or don’t appreciate key aspects of how CFDs work, despite the fact that they are actively trading them. This guide aims to fill some of these knowledge gaps, especially around the trading risks.”

Key Rule: “First do what you understand”

I agree wholeheartedly with the guideline provided by ASIC that retail investors should consider trading CFDs only if they:

  • have extensive trading experience;
  • are used to trading in volatile market conditions; and
  • can afford to lose all of – or more than – the money they put in.

View the guide on ASIC’s webiste or download a copy of Thinking of trading contracts for difference (CFDs)? here now.