CFDs, or contracts for difference, are agreements between two parties that are agreed upon before the trade begins.
There are two types of CFD: long and short. The party that chose which side of the trade they wanted to go with will be known as the buyer, while the other will be called the seller.
When both parties have accepted a deal in a financial transaction, it becomes binding if you decide to invest using CFDs when you buy at the offer price and sell at your desired price, whether it is higher or lower than what you bought for).
It means that you do not own any shares in a company when investing in this fashion. You can then choose to close your investment position whenever you want, provided that the market is still open.
Are these contracts even legal?
Although there is no single answer to this question, it seems that they are entirely legal in certain countries and illegal in others. Some people say that these financial instruments are too risky for retail investors who do not possess the skill set necessary to manage their risk exposure when trading CFDs.
Furthermore, some brokers may be exploiting uninformed traders by offering them unfair trading conditions with hidden fees and commissions.
Financial Conduct Authority (FCA)
Some countries have started investigating the legality of CFDs. In September 2014, the UK’s Financial Conduct Authority (FCA) stated that they were not a legal form of trading or investing and forced brokers who had been offering them to withdraw this service from non-professional investors.
However, as of March 2015, several other European financial regulators still allow retail clients to trade CFDs, including Germany, Austria, France and Italy.
In 2016 the FCA also announced that it would be reviewing whether leveraged products should be subject to increased regulation due to their risk profile. At present, there is no agreed definition for these instruments, so the regulator must first establish what makes them ‘leveraged’.
Regardless of the legality of CFDs, they are still available for sale in most countries.
Before investing in CFDs, there are a few things to consider, as it can be a risky proposition if not used properly.
There are commissions involved
Firstly you need to understand that there will be a commission involved for each trade and these costs have to be included in your calculations when considering whether this type of trading makes financial sense.
For example, with IG Index, commissions are charged at 4% on either side of the deal. It means that you would pay £4 on every £100 invested – so if one were to risk £1,000, they could lose up to £40 from their investment based on the size of commission paid per trade.
Also, note that spreads charged by the brokers will fluctuate over time, which is an ongoing cost that a CFD investor needs to factor into their calculations. The size of the spread being charged can significantly impact your profitability, so you need to consider it carefully when making your investment decisions.
Finally, because CFDs are derivatives, you should not invest in them if you do not fully understand how they work and know what risks are involved.
Financial company scandals
There is also the risk of scandals hitting financial companies from time to time which could cause significant losses for investors who use these products to make money from trading up or down. If you want to trade using CFDs, it pays for traders to research to understand how the markets operate and what risks are involved.
So, are CFDs legal?
The short answer is that they may or may not be depending on where you live and how you use them. Before deciding to invest in CFD s, it’s essential to understand the benefits and risks of this type of trading product.