There are many myths about the CFD trading business. These misconceptions can be difficult to disprove because there is no established professional organization which anyone involved directly or indirectly with the CFD trading industry should belong to, unlike other financial markets.
Myth #1: All CFDs are offered by all brokers
The first myth is that all CFDs are offered by the same broker. This is actually not true as each brokerage firm uses different trading software and technology (for example, some offer trading on the MT4 platform while others might use their proprietary systems).
While brokers may look similar on the outside due to their websites’ resemblance to one another, they usually act independently from each other; for instance, if one broker provides customers with negative balances protection upon request whereas others do not provide it at all.
Myth #2: All CFDs are a scam
Another myth is that CFDs are some sort of scam. This is not true as they are allowed by the Financial Industry Regulatory Authority (FINRA) in the USA and by regulators all around the world.
Moreover, since 2010, Australian residents have been allowed to trade CFDs with any licensed broker – i.e., this type of trading is regulated just like on any other exchange, including our very own ASX.
Myth #3: CFD brokers use shady tactics
Another misleading perception about CFD brokers is that they employ shady business practices. This myth includes potential shady marketing tricks aimed at taking advantage of the lack of knowledge among most investors or their naivety under pressure from brokers’ salespeople who might be cold-calling them hourly.
While there are many cases where customers complain about being charged excessively high fees for withdrawals, in most cases it is actually the customer who agrees to all conditions when he or she opens an account.
The truth about CFDs
CFD trading in Australia has grown in popularity because of the fear of volatile global markets and uncertainty about where exactly they might be heading. These instruments offer a convenient alternative to buying shares or ETFs – no need to sign any documents or wait for days/weeks for your trade to go through.
CFDs are flexible
CFDs are so flexible that traders can use them to open both long and short positions (this means selling something you do not own yet hoping it will go down so you could buy it at a lower price than right now).
The risk is the same as in any other trade
However, CFDs are just like any other financial instrument – it’s never 100% safe to trade, and you might lose your shirt if you don’t know what you’re doing. It is true that CFD trading might be a dangerous game if not done right, but such risks are not necessarily higher than those of the Forex market where traders can risk their capitals just as easily.
The bottom line is: before deciding to trade anything on any exchange, one should learn as much as possible and do extensive research about potential risks involved with this activity.
Moreover, it would be wise to only deposit the money that one can afford to lose and never treat CFDs as a way to make easy money due to the high leverage factor (up to 1:500) – experts say it’s better not to use more than 20-30%of your to-deposit funds.
Not everybody is an expert
It is always advisable to treat information from friends and family as just that – information. In this way, if you have been relying on the advice from those who know absolutely nothing about CFD trading (or any other financial activity for that matter), you will be more likely to make the right decisions when choosing a brokerage firm.
Don’t feel embarrassed or ashamed to ask questions, don’t let anyone pressure or intimidate you into making hasty decisions like trading with untrusted companies; after all, there are no stupid questions in this business!
As long as you keep yourself informed of actual facts instead of myths, do your research before acting rashly under pressure or reacting emotionally.