ASX-listed CFDs are not suitable for all traders and investors. In light of the risks associated, you should only trade them if you are confident that you understand ASX-listed CFDs and the risks. Before trading ASX-listed CFDs you should carefully assess your experience, investment objectives, financial resources and all other relevant considerations and consult your adviser. Among the main risks of trading ASX-listed CFDs are the following:
Implications of leverage
Leverage (or gearing) is the use of given resources in such a way that the potential positive or negative outcome is magnified. ASX-listed CFDs are leveraged. They offer the potential to make a higher return from a smaller initial outlay than for a non-leveraged transaction such as direct share investing.
Additional margin calls and unlimited loss
It is important to note that the liability for a holder of either a long or short ASX-listed CFD position is not limited to the margin paid. If the market moves against a position or margin levels are increased, then the holder of that position may be called upon to pay additional funds on short notice to maintain the position.
If a holder of a position fails to comply with a request from their broker for additional funds within the time prescribed, the broker may close out the position. In addition, the holder will still be liable for any further losses that may have resulted from the position being closed out.
Foreign exchange risk
Not all ASX-listed CFDs are denominated in Australian Dollars. It is important to keep in mind that when trading overseas index CFDs all profits/losses are denominated in the currency of the particular product. For example, the ASX DJIA CFD is denominated in USD.
Market conditions (for example, lack of liquidity) may increase the risk of loss by making it difficult to effect transactions or close out existing positions.
Normal pricing relationships may not exist in certain circumstances. For example, normal pricing relationships may not exist in periods of high buying or selling pressure, high market volatility or lack of liquidity in the market for a particular ASX-listed CFD.
Market disruptions/emergencies and issue resolution
ASX-listed CFD transactions are subject to the rules, procedures, and practices of ASX and ASX Clearing Corporation. Under the ASX 24 Operating Rules, certain trading disputes between market participants (for example trades executed in the extreme trade range) may lead to ASX cancelling or amending a trade. In these situations your consent is not required for the cancellation of a trade.
In some circumstances underlying instruments or securities may be halted, suspended from trading or have their quotations withdrawn from the exchange. These factors will directly affect an ASX-listed CFD’s value.
To learn more about the risks of trading ASX-listed CFDs read Understanding ASX-listed CFDs.