Is a CFD dangerous?
The stock market is a place where a lot of money can be earned, but where a lot of people also find themselves losing a lot of money. It all depends on how much you invest, what kind of stock you are investing in, and what kind of investment it actually is. A CFD doesn’t have to be dangerous, but sometimes it can be. In this article we’ll explore the question “Is a CFD dangerous?”, and we’ll take a closer look at the risks of a CFD.
Beware of leverage
Investing in a CFD can be very tempting. It’s high-risk/high-reward, which sounds tempting to some. The reason some people connect the word CFD to the terms “CFD dangerous”, is because the leverage can really backfire. Let’s explain this with an example: John has 500 dollars. He wants to invest in a CFD. Because this is a CFD, John can take a much higher position of 5000 dollars, because his broker will fill in the other 4500 dollars. The CFD is going great, and the share rises by 10 percent. The position is now 5500 dollars. John’s investment of 500 dollars has now doubled! He has earned a 1000 dollars. This has been great for John.
A couple months later John has suddenly come into money. He now has 5000 dollars to invest. He chooses a CFD of 50.000 dollars. The broker fills in the other 45.000 dollars. However, this CFD share falls by 10 percent. John has now lost his entire investment. So is this CFD dangerous? Yes. In John’s latter case, it is. John is lucky that the share only fell by 10 percent, because if it had been more that meant he would be in debt with his broker. That’s why you should always beware of the leverage on the CFD, otherwise it will easily become a “CFD dangerous” case for you.