CFD certificates are misunderstood and there are a large number of myths surrounding CFD certificates. These myth have given CFDs a reputation the financial instrument does not deserve. CFD certificates are not a scam and there are plenty of large reliable CFS brokers that offer fair hedged trading. It is despite this common that you see negative myths being spread by otherwise reliable and well informed websites and sources for financial news.
In this article we are going to look a little closer about why some people erroneously think CFD certificates are a scam.
Bad financial advice
One of the main reason that CFD certificates are suffering from a bad reputation is that financial advisers have recommended CFD to people who never should have invested in CFDs. People that did not know what a CFD was nor the risk associated with the trade. People who were looking for long term safe investments and were tricked into investing in CFDs.
The root to this problem is one of the largest problems with the financial retail market in the US. Most people who visit a financial adviser expect the adviser to look at their economy and recommend the investments that are most suited for their economy and their goals. The adviser has no obligation to do so. They can sell any financial product to their clients. Many do focus on their clients needs but other will recommend what ever product can earn them their largest sales pay day. This causes a problem. The client trust the adviser because they think the adviser is knowledgeable and have their interest at hearth while the adviser is really only looking out for himself. Some advisers have tricked retirees and other investors to invest their entire savings long term in CFDs. This is very irresponsible due to the high risk and not what CFDs are meant for. In many cases the investors have lost their entire savings and when the media finds out about the story then they report on it a way that put both the adviser (guilty) and CFDs (innocent) in a bad light.
The solution is to obligate all financial advisers to put the clients interest first. Today only fiduciaries have an obligation to do so.
There has been a lot of unlicensed brokers, boilerroom operations, that have scammed people out of money by offering products that are similar to CFD but designed to make sure that people lose money. Products that are traded against the broker and where the broker do whatever it takes to make money. These unlicensed scam brokers should however not be allowed to taint the reputation of proper honest CFD brokers licensed by the British finance inspection or other reliable governing body.
This has no more to do with honest CFD brokers than penny stock boilerroom scams has to do with the stock market. The boilerroom operations are scams. Stocks are not a scam.
The broker earn money when you lose
This is not true when you trade with a reliable regulated CFD broker. It might be true if you trade with an unlicensed broker (something you should never do.) and when you trade with binary options but it is not true when you trade CFD:s. The CFD broker will hedge your position on the open market by buying the asset the CFD is based on. The CFD makes their money from thespread. They do not earn money when you lose money nor to they lose and money when you make a profit. CFD brokers want you to earn money. If you do then you will trade more and they will earn money.
The reason that you have to pay an overnight fee when you hold CFD certificates over night is that the broker wants to get a return on the money they use to hedge your position on the open market. The overnight fee is the interest rate you pay the broker on the loan that made your leveraged position a reality.
CFD certificates are very high risk instruments and you can theoretically lose an unlimited amount om money regardless of the size of your investment. You risk losing more than you invested and more than you have deposited to your account.
Unfortunately there are traders that trade CFD certificates without realizing this and that, understandably, get very upset when they find out they lost more money then they thought possible. They have no one but themselves to blame but it still easy to understand how they can feel scammed and voice their outrage against CFD certificates.
Nothing that has been said above changes the fact that CFDs are a very useful and powerful tool that you can use to earn a lot of money if you understand how to use it. It is not a scam, but it is a financial instrument that only is suited for traders that understands them and know how to use them responsible. CFD trading is very unsuited for most traders and most investors should stay far away from CFDs and other leveraged high risk financial instrument.