European regulators have issued a warning to retail investors about the dangers of investing in complex contracts for difference products.
A CFD is a contract between a buyer and a seller where one party will pay the difference between the current value of a company’s share and its future price.
The European Securities and Markets Authority and the European Banking Authority say inexperienced retail investors across the EU are being tempted to invest in CFDs given the current environment of low investment returns.
The authorities say investors should only consider trading in CFDS if they have “extensive experience” of trading in volatile markets.
Investors have been told to check whether a CFD provider is authorised to carry out investment business in their country, and to ensure they understand trading costs.
They have also been warned to ensure they understand whther the CFD provider will disclose the margins it makes on trades, hows prices are determined, and whether there is an investor or deposit protection scheme in place in the event of counterparty or client asset issues.
In a joint statement, EBA chair Andrea Enria and Esma chair Steven Maijoor say: “Retail investors across the EU should be aware of all the risks arising from investing in CFDs. These products appear to promise investors substantial returns at a low cost but may ultimately cost them far more than they may have intended or could afford to lose.
“CFDs are complex products that are not suitabile for all types of investors. Investors should always make sure they understand how the product they are buying works, that it does what they want it to do and that they are in a position to take the loss if it fails.”