Before you start trading CFDs, it is important to carefully consider the risks in dealing with CFDs as an avenue to gain exposure to market fluctuations. CFDs are a risky financial product and it is very important that you are aware of the speculative nature of CFDs. A CFD is a highly leveraged financial product and hence carries a greater risk compared to non-geared trading vehicles such as share trading. There is the imminent danger of potentially losing large amounts of money: an amount of money greater than the amount you have deposited into your CFD trading account. This is an important point, important enough to repeat: The losses that you may sustain as a result of CFD trading could be over and above the money you deposit into your CFD trading account as well as the margin required by you.
It is important that you understand where the risk is in CFD trading and ensure that your trading plan covers, recognises or minimises the CFD trading risk. Remember: most major losses can be avoided if you follow your trading rules and cut your losses short (at the price you previously planned). Remember that the market has a mind of its own, markets can be highly volatile (and can gap) and respect the market. Here are some points to examine and think about in order to be aware of the risks involved with CFD trading: margin calls (positions being liquidated and funding your account immediately), gapping or volatile underlying markets, foreign exchange variances, interest rate changes, spreads, your CFD provider (if it goes broke or insolvent), regulatory changes, delays and other operational risks and the fact that CFDs are not traded on a licensed market (for some particular providers).