Ireland’s central bank said in a report that 75 percent of traders who use contracts for difference (CFDs) to make their market bets incurred losses over the period of 2013 to 2014.
The research involved 35,000 retail traders who used the services of Ireland-based brokers and found that besides the losses, which averaged €6,900 ($7,300), there were differences among trading service providers regarding the assessment of clients’ risk appetites.
Good Compliance Levels
The Central Bank of Ireland noted that some of the firms operating in this niche had fulfilled all requirements regarding the assessment of how appropriate a trade was, others tended to overestimate their clients’ knowledge and experience in the field.
Another finding was that most companies involved in the survey were compliant with legislative requirements concerning the handling of client complaints, although some were found to be lacking in the area of maintaining up-to-date records.
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Potential of losing more than the initial investment
Also, promotional materials were not always sufficiently clear and explicit with regard to both the benefits and risks associated with CFD trading.
The central bank’s Director of Consumer Protection commented, “CFDs are unsuitable for investors with a low-risk appetite. This is due to the volatile nature of the CFD market, coupled with the potential for a consumer to lose more than the initial investment. Consumers need to be made fully aware of the high-risk and complex nature of CFDs before making investment decisions.”