Home Trading What are the Risks are involved in Trading Contracts for Differences?

What are the Risks are involved in Trading Contracts for Differences?

CFD trading in Singapore comes with numerous risks making it ideal for only a certain fraction of investors. Seeing that CFDs are extremely leveraged OTC (over the counter) derivatives, traders can lose more money than their initial deposit. Further, the potential for incurring losses is unlimited. In this post, we shall discuss CFD trading risks every investor in Singapore should avoid.

Counterparty Risk

The counterparty is the firm that offers security in a financial transaction. When selling, or buying a CFD, the only security that is traded in the contract that a CFD provider in Singapore provides. This practice uncovers the trader to the CFD provider’s correspondents like other clients that he (CFD provider) collaborates within the business.

The related risk, in this case, is the counterparty’s failure to discharge its financial responsibilities. If the provider does not meet these responsibilities, the value of the underlying security loses relevance. It is critical to understand that the CFD industry is less regulated. The credibility of a broker depends on reputation, financial position, and longevity as opposed to liquidity and government standing.

There are reputable CFD brokers, for example Saxo, but traders and investors in Singapore should do their due diligence on a broker before opening an account. Some countries bar their citizens from trading CFDs.

Market Risk

When it comes to trading CFDs, investors trade depending on the predictions of the underlying assets like shares. If a trader feels that the underlying security will rise, they will pick the long position. On the other hand, if the investor chooses a short position if they believe the asset will fall.

While investors believe the underlying security will move in their preferred direction, sometimes it does not. Sudden information can have an impact on market positions, and government policy can trigger quick changes. Seeing that CFDs are very volatile, small changes can affect the returns.

An adverse impact on the value of the underlying security can force CFD providers in Singapore to claim a second margin fee. When the margin calls cannot be achieved, you may end up selling at a loss, or your CFD provider could close your position.

Client Money Risk

In countries where Contracts of Differences are valid, there are client cash protection regulations. These (regulations) safeguard the investor from falling victim to the CFD provider’s illegal practices. According to the law, money that is reassigned to the CFD provider should be restricted from the CFD provider’s money.

Such restrictions are in place to ensure providers do not hedge their investments. Still, the law does not stop the investor’s money from being combined into one or different accounts. When there is a contract agreement, the CFD provider pulls out an introductory, margin, and the right to demand additional margins from the combined account.

If the other investors in a pooled account do not meet margin calls, the CFD provider can draft from the combined account. Such an action can have an impact on returns.

Market Gapping and Volatility

Financial markets can fluctuate rapidly, and this will reflect on the price of underlying assets. Gapping is a risk that occurs due to market volatility. This risk occurs when the price of underlying assets shift suddenly from one level to the other, bypassing the level in between.

Traders will not always enjoy an opportunity where the platform enforces an order. Often, they will not manage to place an order between the two price levels. One of the impacts of this process is that stop-loss orders are enforced at hostile prices, that is higher or lower than your expectations.

Traders in Singapore can limit the risk and effect of market volatility by applying a guaranteed stop-loss order or order boundary.

Understand how CFDs Work Before Investing in Live Trading

Not everybody can trade CFDs. Investors should understand how the product works and the potential risks involved before investing. Further, traders in Singapore should understand the total amount of money they allocated to their trading account.

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