CFD trading: What investors should pay attention to when trading with leverage
Unlike stock trading, CFD trading means that investors only have to spend a fraction of the investment amount on their trading position. CFD traders only deposit a security deposit, or margin for short. The margin rate depends on the chosen underlying.
The investment costs for CFD trading are therefore significantly lower than those that would be due for a direct investment in the underlying. Most of these costs are only one to ten percent of the amount traded. In CFD trading, investors trade the underlying asset almost on credit.
As a rule, buyers therefore have to pay financing interest. On the other hand, investors who go short with CFDs usually receive credit interest. The reason: you first appear as a seller of a CFD. The short traders then have to buy back the “short” CFD when the position is dissolved.
The key role in CFD trading, however, is leveraged. With contracts for difference, investors leverage their stake 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 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, investors move 100,000 euros on the stock exchange (10 x 10,000) when trading CFDs. 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 is 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 is around 1,000 euros (10 x 100 euros ) doubled to 2,000 euros.
Danger: Also and especially with CFD trading, investors should definitely note that every opportunity is also associated with a corresponding risk. If the DAX falls by 50 points (-0.5%), the CFD contract mentioned in the example above loses its value (-50.0%). As you can easily see: CFD trading involves considerable risks. Until May 2017, investors could even lose more than just their deposit (obligation to make additional contributions). Thanks to a “general order” issued by BaFin (Federal Financial Supervisory Authority) on May 8, 2017, 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 changes in exchange rates: In January 2015, the Swiss central bank announced the removal of the peg of the Swiss franc to the euro. On this day, the EUR / CHF currency pair saw violent price fluctuations, at times the associated currency pairs were no longer tradable. Ultimately, the decision by the central bank caused the Swiss franc to appreciate about 20 percent against the euro. Depending on their positioning, investors in appropriately leveraged CFD contracts recorded extraordinarily high profits or exorbitant losses. More on this at boerse.ard.de.
Conclusion: CFD trading is only suitable for experienced and very speculative investorswho are very familiar with the necessary risk / money management of trading. Investors who want to avoid these risks should therefore prefer traditional trading of shares.