CFD trading: what investors should look out for when trading with leverage
Unlike stock trading, investors in CFD trading only have to pay a fraction of the investment amount for their trading position. CFD traders only deposit a security deposit, or margin for short. The margin rate depends on the selected underlying.
The investment costs for CFD trading are therefore significantly lower than those that would be due for a direct investment in the underlying. These costs are usually only one to ten percent of the traded amount. With CFD trading, investors trade the underlying asset on credit.
As a rule, buyers therefore have to pay financing interest. Investors who go short CFDs, on the other hand, usually receive credit interest. The reason: You initially appear as a seller of a CFD. The short traders then have to buy back the “short” CFD when the position is closed.
Leverage plays a crucial role in CFD trading. With contracts for difference, investors leverage their stakes many times over.
An example: When trading ten DAX contracts, the CFD trader deposits a margin of one hundredth or one percent. With a DAX index level of 10,000 points, the margin is 1,000 euros (10 x 10,000 x 1/100). In other words: With an investment of 1,000 euros, CFD trading investors move 100,000 euros on the stock exchange (10 x 10,000). If the DAX then increases by 100 points to 10,100 index points, the CFD contract reacts exactly like the index, thus gaining 100 euros in value. What represents a change of just one percent for an ETF or certificate investor is equivalent to a change of one hundred percent for the CFD trader investing with leverage, since the value of his ten DAX CFDs has increased by EUR 1,000 (10 x EUR 100 ) doubled to 2,000 euros.
Danger: Also and especially with CFD trading, investors should definitely note that every opportunity is accompanied by a corresponding risk. If the DAX falls by 50 points (-0.5%), the CFD contract mentioned in the example above loses massively in value (-50.0%). As you can easily see: CFD trading is associated with not inconsiderable risks. Until May 2017, investors could even lose more than just their deposit (obligation to make additional payments). Thanks to a “general decree” from BaFin (Federal Financial Supervisory Authority) of May 8th, 2017 However, private customers may no longer be offered contracts with an obligation to make additional payments.
An example from 2015 shows how violently CFDs can react to price changes: In January 2015, the Swiss central bank announced that the Swiss franc would be unpegged from the euro. On this day, the EUR/CHF currency pair recorded sharp price fluctuations, and at times the associated currency pairs were no longer tradable at all. Ultimately, the central bank’s decision caused the Swiss franc to appreciate by around 20 percent against the euro. Depending on their positioning, investors in highly leveraged CFD contracts recorded extraordinarily high profits or exorbitant losses. More on this in “Euro am Sonntag” (Issue 21/2015).
Conclusion: CFD trading is only suitable for experienced and very speculative investorswho are very familiar with the risk/money management required for trading. Investors who want to avoid these risks should therefore give preference to traditional trading in shares.