You might be wondering what CFDs are and how these contracts work. Well you’ve come to the right place to know what they are. A CFD also known as contract for difference is primarily a contract or an agreement between a buyer and a seller that states that the buyer must pay the seller the difference between the current value of an asset and the value of that asset at contract time. These contracts allow traders and investors with several opportunities to make profits from the market volatility and the constant price movement without actually owning the assets.
The value of any CFD contract does not at all consider the underlying value of the asset, instead it only considers the price fluctuation or change between the trade entry and exit. This motive is simply fulfilled by a contract between the client and the broker and this contract doesn’t utilise any type of Forex, stock or any commodity. There are several advantages to trading CFDs which includes an access to the underlying asset at a price which is actually lower than buying the asset, ease of executing and the ability to go long or short.
However, since this market is very dynamic it has several risks as well which include the immediate and sudden decrease in an investors position in the case of a non favourable price movement, volatile market changes, gapping, holding costs and lastly lack of liquidity. This form of trading is very risky which is why it’s banned in several counties. I know it’s a lot to take in but I’ve made it simple for everyone thanks to the EzChargeback website. This website has all the information needed for beginners and provides you with tons of knowledge about CFDs, their risks, the types of CFD trading fraud and scams. Do check out their website for further information. It’s great for beginners and it allows you to polish your skills.
Is it illegal in several countries?
CFD trading is illegal in the United States and it is banned for all the citizens from the U.S. Both the commodity of future trading commission also known as the CFTC and the securities and exchange commission also known as the SEC prohibit the residents of the United States and citizens from opening any sort of CFD accounts on any domestic and foreign platforms.
In addition to the United States, CFD trading is also banned in Hong Kong. There are several reasons for it being illegal the first one being that it is similar to gambling since you’re betting on the prices of stock without actually owning the asset and there have been several scams due to CFD trading which is why it’s illegal in these two countries.
Moreover, CFDs are declared illegal in the United States because they are the result of over the counter trading which primarily means they are unregulated and there is no government interference. This allows CFD brokers to leverage customers and there is a great risk of immense losses.