Trading in CFDs carries a high risk, as when you trade CFDs you’re trading on the real-time movement of a financial market. The markets can move quickly throughout the day, so the value of your account can also change quickly. CFDs may not be suitable for every investor. It’s up to you to decide whether or not you’re comfortable trading CFDs, and you shouldn’t trade CFDs without understanding the risks involved. If you’re in any doubt, you should seek independent professional advice.

Our Risk Warning Notice covers the risks of trading CFDs with us in more detail. Make sure you read it before you open a CFD trading account.

More about risk

1. Leverage

With CFDs, you deposit a small percentage (or margin) of the total value of the underlying asset in order to secure a position. So, if you buy $1,000 worth of XYZ CFDs that have a margin requirement of 5%, you only need to provide margin of $50 to open the position. However, your exposure to the market (or risk) is the same as if you’d purchased $1,000 worth of shares at face value.

Your risk is the same as if you’d purchased the same number of shares at face value.

2. You’re not buying or trading the underlying asset

A CFD is a contract between you and CMC Markets that could result in either a benefit or a loss from either rising or falling prices. While the price of the CFD usually mimics the price of the underlying asset this isn’t always the case. You need to be aware that you’re not buying the underlying asset. We provide CFDs on a range of underlying assets including shares, commodities, foreign exchange, treasuries and indices such as the Australia 200, which aggregates the price movements of all the top 200 stocks listed on the ASX.

You do not own the underlying asset.

3. You can lose more than your initial deposit

When you trade CFDs you’re required to provide a small percentage of your total exposure, in the form of margin payment. However, your total profit and loss potential is much greater than the amount of margin that you pay. So, if you buy $1,000 worth of XYZ CFDs with a margin requirement of 5%, you only need to provide margin of $50 to open the position. If the position moves against you by 10%, you will lose $100 – double your initial deposit.

Depending on the CFD trades you’ve opened, and how long they are open for, we may require you to pay holding costs. You’ll incur these holding costs on a daily basis when you keep CFDs on certain underlying assets open overnight (overnight cut-off is 17:00 New York time). In some cases, particularly if you hold CFDs for a long time, the aggregate of these holding costs may exceed the amount of any profits or significantly increase losses.

If the position moves against you, or you allow holding costs to add up, you could lose more than you have deposited.

4. Risk of close-out

The value of your account must always remain above the close-out level. If it falls below this, the platform will attempt to close all your CFD transactions. It’s up to you to monitor your positions. To prevent your CFD positions being closed, make sure you’ve deposited enough funds to keep your account value above the close-out level. If your trade doesn’t go as you expect, you may be required to deposit additional funds with CMC Markets in order to hold your position.

For example:

• If you have four leveraged share CFD positions each requiring a minimum margin of $500, your minimum margin requirement is $2,000.
• If your account value drops to less than 20% of the minimum margin requirement (in this case $400), all of the positions you hold will be closed.

The platform will attempt to close out all your positions if your account value drops below the close-out level.

5. Counterparty risk

A counterparty is the person or company on the other side of a financial transaction. When you take a CFD position, you’re buying a contract issued by us, and as a result we are your counterparty in the transaction. There is a risk that, as the counterparty to the trade, we may fail to fulfil our obligations to you. This may be because we, or one of our own counterparties (such as our hedge provider), fall into financial difficulties.

There is a chance, however unlikely, that we may not be able to fulfil our obligations to you.

6. Client money risk

Client money is held in a segregated trust account, separate from our own money. Client money is deposited into this account either on the day it’s received or owed to you, or on the next business day. As soon as that money is deposited into that account, it is protected.

Client money is not used to meet the trading obligations of other clients. Client money on deposit with CMC Markets is held in a separate trust account established, maintained and operated in accordance with Monetary Authority of Singapore (MAS) regulations. This means that client moneys are protected.

When you place a trade with us, we are entitled to withdraw your minimum margin requirement and any other amounts payable to us. Money withdrawn by us for these purposes ceases to be client money and will no longer be held in the segregated account.

7. CFDs are over-the-counter (OTC) derivatives

When you trade CFDs with us, you are entering into an off-exchange (also known as an over-the-counter, or OTC) agreement with us. This means that CFDs are traded directly with us and not through an exchange such as the SGX. Therefore, you don’t gain the benefits associated with trading through a licensed market (such as having a central clearing house guarantee our obligations to you).

Trading with us means you don’t gain the benefits of trading through a licensed market.

8. Market volatility

The ability of our CMC Markets platform to generate prices and execute orders is dependent on the availability of prices and liquidity in the exchanges, markets and other venues from which we gather data. In addition, because we maintain our own financial stability by hedging with other counterparties, we may be unable to execute your orders where we cannot enter into a corresponding transaction to hedge our own risk (for example, due to the activities of an issuer of shares to which your transactions relate, which can sometimes restrict the market liquidity in those shares). Therefore, market circumstances may impact on your ability to place an order or close a transaction with us. In contrast, if we enter into a corresponding transaction, to hedge our risk, this may have an influence on the underlying market conditions and consequently also on the prices we quote on the platform and your account.

Financial markets may fluctuate rapidly and prices of our products are no exception. Any movements in our prices will have a direct effect on your account.

One form of price volatility that can happen regularly is called ‘gapping’. This occurs where there is a sudden shift in price from one level to another. This can be caused, for example, by unexpected economic events or market announcements, particularly where these occur outside trading hours. There may not always be an opportunity for you to place an order between the two price levels, or for our CMC Markets trading platform to execute an open order at a price between those two levels. Certain markets also have limited trading hours which can impose a significant risk to your ability to place orders and close transactions.

Gapping may result in stop loss orders being filled higher or lower than anticipated.

9. CMC Markets does not give personal advice

Information we provide is general information only. Accordingly, before applying to trade with us, you must consider your objectives, financial situation and needs and the significant risk of loss which accompanies the prospects of profit associated with trading in CFDs. We recommend you read our Risk Warning Notice carefully and obtain independent financial, taxation and other professional advice concerning the Risk Warning Notice before you apply to open a CFD account with us. We can’t guarantee specific results from trading in CFDs.

Trading CFDs is risky, and we can’t offer advice or guarantee results.

10. Technical risks and other circumstances may affect your transactions

There is a risk that other circumstances may prevent us from executing orders, or prevent you from accessing our CMC Markets trading platform. These include, for example, system errors and outages, maintenance periods, internet connectivity issues and failures of third parties on whom you or we are dependent (for example, internet service providers or electricity companies). We have business continuity measures in place to deal with some of these issues, but in some circumstances you may not be able to access the CMC Markets trading platform. These technical risks and other circumstances can pose a significant risk to your ability to place orders and close transactions.

There may be circumstances beyond our control that affect our ability to support your trading.