The Fight Club Of Finance

CFDs are a risky investment, but the payoff can be huge when – or if – it comes

- David Thornton

Once the domain of professional investors looking to hedge their portfolios, contracts for difference (CFDs) are increasingly being traded by retail investors. But are they worth the risk?

CFDs are over-the-counter (OTC) derivatives, so the underlying security is never physically owned.

They are essentially a two-way bet between a provider and a trader that security, such as stock or currency pair, will either increase or decrease in value. Traders can bet that security will go up, known as going long, or that it will go down, known as going short.

But perhaps the most significant aspect of CFDs is that they allow traders to leverage their position. And this is where the bodies are buried.

Leverage amplifies the position such that the gains or losses are based on the levered trading amount, not the initial investment.

“If you had $100 and you had the leverage of 300:1, you’re taking a $30,000 position with your $100,” says Peter Campbell, a financial adviser at Meridian Wealth Strategies.