Understanding the risks of CFD Trading

Before you decide to trade CFDs we want you to know about the risks involved.

When you trade CFDs there are a few things you should be aware of. The most important thing to remember is that trading CFDs carries a high level of risk compared to other kinds of investments. It may not be appropriate for every investor. Because of this, it’s up to you to decide whether or not you’re comfortable trading CFDs, and you shouldn’t trade CFDs without understanding the risks involved. If you’re in any doubt, you should seek independent professional advice.

Leverage

With CFDs, you deposit a small percentage (known as initial margin) of the total value of the underlying asset in order to open a position. So, if you buy £1,000 worth of XYZ CFDs that have a margin requirement of 5%, you only need to pay an initial margin of £50 to open the position. However, your exposure to the market (or risk) is the same as if you’d purchased £1,000 worth of shares at face value.
Your risk is the same as if you’d purchased the same number of shares at face value!

You’re not buying or trading the underlying asset

A CFD is a contract between you and CMC Markets that could result in either a profit or a loss from either rising or falling prices. While the price of the CFD usually mimics the price of the underlying asset, this isn’t always the case. You need to be aware that you’re not buying the underlying asset. We provide CFDs on a range of underlying assets, including shares, commodities, foreign exchange and indices such as the UK 100, which aggregates the price movements of all the 100 stocks listed on the FTSE 100.
You do not own the underlying asset!

You can lose more than your initial deposit

When you trade CFDs you’re required to provide a small percentage of your total exposure, in the form of an initial margin payment. However, your total profit and loss potential is much greater than the amount of initial margin that you pay. So, using the same example as above, if you buy £1,000 worth of XYZ CFDs with a margin requirement of 5%, you only need to provide initial margin of £50 to open the position. If the position moves against you by 10%, you will lose £100 – double your initial deposit.

Depending on the CFD trades you’ve opened, and how long they are open for, we may require you to pay holding costs. You’ll incur these holding costs on a daily basis when you keep CFD positions on certain underlying assets open overnight. In some cases, particularly if you hold CFDs for a long time, the sum of these financing costs may exceed the amount of any profits, or they could significantly increase losses.

If the position moves against you, or you allow financing costs to add up, you could lose more than you have deposited!

Risk of margin call and close out (or liquidation)

Margin call
To keep CFD positions open, you need to have enough funds in your account to cover your margin obligations. When your margin obligations are no longer covered, you must immediately deposit additional cleared funds or close positions so that the funds in your account cover the margin. Margin shortages can arise quickly as market values change and may arise outside normal business hours if you are trading international markets. Unless you have sufficient funds in your account to cover these situations, there is a risk of having to close positions when you may prefer not to.

Close out (or liquidation)
The value of your account must always remain above theclose-out level. If it falls below this, your CFD trades are at risk of being liquidated. We may liquidate your position to protect both you and us, as no one wants your account to move into a debit balancing. It’s up to you to monitor your positions. To prevent the liquidation of your CFD positions, make sure you’ve deposited enough funds to keep your account value above the close out level. If your trade doesn’t go as you expect, you may be required to deposit additional funds with CMC Markets in order to hold your position.

The ‘Client Position Keeping’ window on our platform is where you can find specific close out levels for every open position you hold.

For exampleIf you have four share CFD positions that each required £500 worth of margin, your total margin requirement is £2,000.

We may have to liquidate your position if the amount available in your account drops below the liquidation level!

Market volatility

Financial markets may fluctuate rapidly, and the prices of our products will reflect this. One risk that arises as a result of market volatility is gapping. Gapping occurs when there’s a sudden shift in price from one level to another. There may not always be an opportunity for you to place an order between the two price levels, or for the platform to execute an open order at a price between those two levels. One of the effects of this may be that stop loss orders are executed at unfavourable prices, either higher or lower than you may have anticipated.

Gapping may result in stop loss orders being filled higher or lower than anticipated!