Leverage and Risk
Trading contracts for difference on margin means that you are able to take large market positions in relation to the money you have deposited. However, it is important to understand that margin trading magnifies both your profits and your losses. You also have to maintain your margin if the market moves against your position and you may have to remit more funds if your deposited money (margin) isn't sufficient to cover open trading position losses and margin requirements. This may imply sending additional funds at very short notice or reducing the size of your positions.
Many traders choose to limit their risk - or to protect a running profit or open position - by the placement of stop loss orders. A stop loss orders closes out a trading position automatically once a certain price level is hit. Do beware though that stop losses might be filled at a worse price than you had requested. The 'slippage' can happen especially in fast moving market conditions, or where a share opens a trading session well away from its previous close.
Opinions on the risk nature of CFDs are changing
Like most people in the investing industry, I used to perceive CFDs as fairly risky investments and definitely not for the risk-adverse, but my opinion over the last few years has changed markedly. CFDs are today generally seen as either a complement to a physical stock holding to basically get some more leverage, more power out of it. So some people may want to allocate some money on the side to trade CFDs that they're actually willing to take a risk on.
A new generation of investors is emerging with a short-term investment horizon, having grown used to boom and bust. CFDs will always be a tool for investors who are more risk tolerant - most people nowadays are far more keen to take an active interest in the markets and for them CFDs can level the playing field.
Our CFD trading guide provides highlights of the contracts for difference industry and a CFDs course focused on educating investors about CFD risks and trading strategies to improve your trading.
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