The Risks of CFDs in the UK - dummies

By David Stevenson

Of course, inevitable and major worries apply to using CFDs in your investment portfolio in the UK. As with all spread bets, CFDs are geared, leveraged financial instruments and that introduces a number of specific risks, including:

  • Profits and losses can be magnified; unless you place a stop loss you can incur very large losses if your position moves against you.

  • CFDs don’t work for longer-term, buy-and-hold investors. Over time, the costs of holding a CFD increase and buying the underlying asset may have been more beneficial.

  • You have no rights as an investor, including no voting rights.

  • Overnight financing costs are real and compound over time. Long CFD positions are charged interest if they’re held overnight; short CFD positions are paid interest.

The rate of interest charged or paid with a CFD varies between different brokers and is usually set at a per cent above or below the current LIBOR.

The interest on position is calculated daily, by applying the applicable interest rate to the daily closing value of the position. The daily closing value is the number of shares multiplied by the closing price. Each day’s interest calculation is different unless no change occurs at all in the share price.