Is CFD trading serious or a scam?

CFDs are highly speculative derivatives whose prices depend on the price fluctuations or price expectations of their underlying assets. Many newcomers to the stock market do not dare to venture into the field of CFD trading. Some even label CFD trading as dubious. However, such a sweeping statement is wrong!

Certainly, there are black sheep among CFD brokers that have a dubious CFD offer. But the established CFD brokers explicitly point out their regulatory authorities to which they are subject. CFD trading offered in the EU can definitely be considered reputable. However, there are some things to watch out for.

Is CFD Trading Fraud?

Many traders ask themselves this question. In principle, CFDs are one of the riskiest forms of investment on the financial markets. Of course, there is a risk with every investment, but with CFDs this is amplified by the leverage effect. Not only beginners, but also experienced traders have already burned a lot - often even their entire - capital.

When trading CFDs, it is important to proceed exactly according to plan. You should think in advance when to open a trade and where the target for it is. You also need a strategy in case the trade goes differently than planned. The risk should be precisely defined and you should determine where to close the trade in the loss and whether to stay in the trade in the event of a correction.

Anyone can do CFD trading. The execution of a trade is done quickly - and here lies the danger for beginners. They are tempted to exaggerate instead of consciously opening their CFDs according to rules.

CFD trading is not a scam, but it needs knowledge and a lot of practice to achieve sustainable success. Besides the danger of incurring losses due to little knowledge or uncontrolled emotions, there is a risk, especially for beginners, of falling for a fraudulent website. The achieved profits are also transferred reliably and quickly.

What are the regulations for CFDs in the EU?

ESMA (European Securities and Markets Authority) has issued strict regulations for CFD trading in the EU. A distinction is made between private and institutional traders. There are stricter limits for private traders. For example, their leverage for CFDs may not exceed 1:30 according to the regulation. By comparison, brokers from non-EU countries offer leverage of up to 1:2000.

CFD brokers are no longer allowed to advertise bonuses to attract new customers. According to EU regulation, a distinction is made between private and professional accounts. Retail investors, in addition to the leverage restriction in the EU, also no longer have a margin call obligation, which ESMA has banned. CFD platforms must point out the risks of CFD trading and display them visibly on their platform.

ESMA rules in CFD trading

• Classification: A precise distinction is made between private and institutional traders.
• Waiver of margin calls: A ban on margin calls protects retail investors from having to make additional payments in the event of losses.
• Leverage limitation: Only the following levers may be used throughout Europe:

- Major Forex Pairs 1:30

- Other currency pairs and gold 1:20

- Main indices: 1:20

- Other commodities and smaller indices 1:10

- Shares 1:5

- Cryptocurrencies 1:2.

• Margin Closeout Protection: Account closure shall occur when the value of the account falls below 50 % of the initial margin protection amount initially deposited for all CFDs traded.
• Risk warning obligation: Brokers must issue a uniform risk warning.
• Prohibition of bait and switch offers: Brokers may not solicit customers with any advantages or bonuses.

How to recognize a reputable CFD broker?

Unfortunately, there are some black sheep among CFD brokers. You can recognize dubious brokers by spam calls, poor or delayed execution, spreads that are too high, market manipulation or crashing of the CFD platform.

Before registering on a platform, you should check it carefully. A good broker can be recognized by the fact that it is always licensed and regulated. As a rule, such a platform also advertises the regulation. In addition, a reputable CFD platform offers a stop-loss that limits losses.

To be on the safe side, when trading CFDs, choose a well-known broker that has been on the market for years. Unknown providers should be avoided. A reputable CFD broker offers support to every customer. It is characterized by a wide range of markets and favorable trading fees. Its fees are transparent, with no hidden costs. The trading platform is user-friendly and deposits and withdrawals can be processed quickly.

You can find an overview of reputable CFD brokers in our CFD broker comparison.

How safe is my money with CFD brokers?

An important point for customers is the safety of their money with a CFD broker in case the broker files for insolvency. Providers that belong to a protection scheme are considered quite stable. Customer deposits are protected there up to a certain amount in case of insolvency. However, the CFD broker decides for himself how exactly he will safeguard the customer's funds.

Even though most brokers are based in an EU country, there are significant differences. In addition, it is necessary to distinguish between two situations when it comes to deposit insurance. If a broker goes insolvent, customers may have two types of claims against it. On the one hand, these are claims from credit balances on customer accounts, which is not involved in open transactions. On the other hand, there are claims from open CFDs.

If a CFD broker is licensed, the statutory deposit protection normally applies, which protects up to €100,000 of assets per customer in accordance with the EU Directive. However, the deposit guarantee does not represent a claim against a state. The Cyprus crisis in 2013 showed that even states can become insolvent. Cyprus is one of the largest CFD locations in Europe. Thus, most of the Cypriot brokers started to keep customer funds with German or British banks.

Therefore, it makes sense to research exactly and, if necessary, to contact the CFD broker where the customer's funds are kept and how they are secured. A reputable CFD broker will be able to provide detailed information here.

Conclusion: CFD trading is serious

CFD brokers available in the EU are strictly regulated by state institutions. These regulations protect investors and make CFD trading reputable. Also that markets are manipulated is not true, because CFDs always refer to the price of an underlying. Smaller deviations are possible, as it is left on normal stock exchanges.

Those who still have concerns can first start with a free demo account or invest smaller amounts in CFDs. A good Overview of reputable CFD brokers can be found here.