European regulators issued a warning to retail investors about the risks of trading in contracts for difference (CFDs).
The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published a warning to investors, noting that they are concerned that amid the current period of low investment returns, inexperienced retail investors are being tempted to invest in complex financial products, which they may not fully understand and which may put their portfolios at risk.
“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,” said Andrea Enria and Steven Maijoor, chairs of the EBA and ESMA, respectively.
The regulators stress that investors should only consider trading in CFDs if they have extensive experience trading in volatile markets, if they fully understand how these operate, and have sufficient time to manage their investment on an active basis.
It also cautions that investors should carefully read their contract with the CFD provider before making a trading decision to ensure that they at least understand: the costs of trading, whether the CFD provider will disclose the margins it makes on their trades, how the prices of the CFDs are determined, what happens if they hold their position open overnight, whether the CFD provider can change or re-quote the price once an investor places an order, whether it will execute orders even if the underlying market is closed, and whether there is an investor or deposit protection scheme.