A group of European regulators is advising retail investors about the added risks of investing haphazardly in complex contracts for difference (CFDs) products. CFDs or contract for difference is an agreement between the purchaser and seller wherein one party will compensate the difference between the current value of shares of a given company as well as its future price respectively.
The Markets Authority and European Securities together with the European Banking authority argue that novice retail investors across the EU are constantly being tempted and compelled to invest in CFDs despite the present environment of stumpy investment returns.
The governing body that regulates the trades made by CFDs says that investors should only contemplate in using CFDs if they have the necessary and knowledge and experience of trading especially in volatile markets.
Investors were already given individual warnings to check whether their respective CFD provider is registered and authorised in carrying out investment business in their country as well as making sure they fully understood the complexities of trading costs.
Furthermore , they also advised investors to make sure they know whether the CFD provider is fully transparent and will disclose the margins it gains on trades, how prices are decided and whether there are contingencies in deposit protection schemes should problems arise in place of the unlikely event of counter party or client asset controversies.
In a shared statement made by the EBA and ESMA chairpersons, both agreed that retail investors across the EU should understand all the risks involved especially when trading CFDs mainly because the products seem to appear to be a haven for hefty returns at a low cost of acquisition but in reality costs a lot more than they might have initially invested especially if they find themselves at the losing end.
CFDs are very complex products that are very unstable and should not be easily toyed with especially by inexperienced traders. A word of advice for those who are still investigating the pros and cons of CFDs, always make sure that you know how the product works and that it does not simply do what many would honestly think because of the ever growing danger of taking a hard hit especially if it fails.