CFD risks

CFD trading is being pushed in Switzerland of late. Are these a safe investment or is there a lot of risk involved?

Hi there,

CFD are (almost) always leveraged products. That means the trading platform or a third-party lender loans you money (5, 10, or 20 times the amount you invest, for example). The full amount, included the loan, is invested in the CFD position.

If the value of the underlying asset (a stock or commodity, for example) goes up, then leverage works in your favor because the gain is multipled by the amount of money that you borrow (5, 10, or 20 times, for example).

On the other hand, if the value of the unerlying asset goes down, the loss is multiplied by the amount money borrowed (5, 10, or 20 times, for example). The more money you borrow in relation to your own invested capital, the bigger the losses will be.

As long as you have enough money in your account to cover the losses, then you will not necessarily make a capital loss. If you do not close the investment position AND the value of the underlying asset climbs again, you may recover the loss or even make a gain.

The risk of trading CFDs is that because of the leverage used, the losses may be so large that there is no longer sufficient money in your account to cover them. When this happens, the trading platform will normally automatically close your position. Alternatively, it may open a short position (if your position is long) or a long position (if your position is short) at the going price at the time. In both cases, the loss will become an actual, unrecoverable capital loss.

If you use CFDs, it is very important that you have a well-funded account, and that you never have more than a small portion of the money in your account (a maximum of 5 percent, for example) invested at any one time. That way, if the underlying asset falls for a time, the loss is unlikely to exceed the value of your account. That means you can keep the position open if you believe the price will recover.

Read our guide to the risks of trading in CFDs for more information.

Best regards from Moneyguru

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Guide to trading bonds in Switzerland
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