CFD trading is a type of trading where you can speculate on the future value of different assets without actually having to own the asset. CFD:s are almost exclusively used for day trading. Instead of buying the asset, you enter into a CFD, a contract for difference. A CFD gives you the right to the profit if the asset goes up in value during the period you own the CFD the, but you are also responsible for paying any losses if the asset goes down in value. Most CFD:s are leveraged financial instruments. This means that you will earn or lose more money than you would if you invested directly in the underlying asset. How much more depends on the leverage used.
There are both regular CFDs and bear CFDs; A regular CFD allows you to profit when the value of an asset increases. A bear CFD allows you to profit if the value of the asset decreases. CFD trading is very high risk.
Are CFDs a scam?
No. CFDs are not a scam. They are a potent tool that can be very profitable if it is used correctly. They can be very dangerous and cause large loses if used unresponsible. Many people have lost a lot of money trading CFD certificates, sometimes on the recommendation of unscrupulous advisors. This is not an indication of CFDs being a scam. All it tells us is that CFDs isn’t for everyone. Most people are better off avoiding CFDs, but they remain a powerful tool for those who know how to use them correctly.
Most CFD brokers are honest financial service providers, but there have been scam brokers who have entered the market. It is, therefore, crucial to research all companies before you register an account and I recommend that you only trade using well established, well regarded honest CFD brokers such as Plus500 or eToro.
Are they legal?
Whether or not CFD:S are legal depends on where you live. CFDs are banned in the US, and most CFD brokers will not accept US traders. It is possible to find traders that do, but you will have to do some searching to find one. The top CFD brokers do not accept US traders.
CFDs are legal in Europe (European Union/EES(UK) but are subject to strict regulations that limit the maximum losses and the maximum leverage a broker is allowed to offer.
CFDs are banned in Canada.
It is legal or unregulated in most other jurisdictions.
The maximum legal leverage varies between different countries. The maximum legal leverage if you live and use a broker licensed within the European Union is x30. Other jurisdictions do not limit the maximum leverage, and you can find CFDs that offer x250 or even x500. CFDs with very high leverage are usually Forex based.
CFD trading can cause unlimited loses. You can lose more than you have invested and more than you have in your account. You are responsible for paying all losses.
The maximum losses are limited by law if you live within the European Union. You will never risk losing more money than you invested.