Are CFD's in Your Trading Strategy?

This article has been created by one of the writers for the Nasdaq site, I have copied it in its entirety as it covers many important points.

A Survey on Contracts for Difference (CFD) and Spread Bets

The survey covered different aspects of CFD and spread betting instruments and was sent to more than 1000 people - a group comprising of money managers, traders, retail investors and HNWIs which offers valuable insights into the preferences of investors.

The objective of the survey was to discern the rationale and risk perception of active investors regarding CFDs/spread betting. The survey was also designed to identify key trends and preferences in sections of the investment community that is using CFDs/spread betting to take exposure to financial markets. For the purpose of interpretation, the survey has been divided into 3 sections:

• The first section providing insights into the habits and motives of investors.
• The second section captures the perception among investors regarding risk/return propositions associated with trading through CFDs/spread betting.
• The final section gauges the preference of investors for a financial instrument that can provide an alternative to CFDs/spread betting while mitigating some key risks associated with investing in an unregulated market.

The key findings from the first two sections of the survey are listed as follows:

• A significant majority of respondents actively trade using ETFs. Moreover, exchange traded leverage instruments such as options and futures have not found much favour with CFDs/spread betting investors.
• Shorting, leveraged exposure and tax benefits are key factors that have pulled investors towards CFDs/spread betting platforms in the past.
• A majority of respondents have started using leverage only in the last 5 years.
• Contrary to popular belief, an abnormally large proportion of investors have maintained their position for more than 5 days over the last 12 months.
• Across asset classes, investors have preferred to trade at leverage level ranges of 2x-5x in the past year.
• The last 12 months, in general, has been good for respondents and most of them passed the year in green and without any margin calls.
• However, investors are equally concerned about each of the key trading risk factors associated with CFDs/spread betting instruments such as losing more money than the original investment, being closed out of the market and margin calls.
• In the wake of recent bankruptcies, the financial risks of a provider has been singled out as the most significant concern among investors when it comes to regulatory aspect of trading.
• Most investors are also not aware about the practice of keeping separate books among providers, which raises questions pertaining to investor awareness.