Should CFD risk warnings stop you from trading?
Hi, we are BrokerChooser here, we help you make sense of the financial world. When dealing with CFD trading, you may often see various risk warnings on our page referring to brokers, and FBS is no exception. The risk warning tells you what percentage of retail investor accounts lose money when trading CFDs at that specific broker.
But what exactly does this risk warning mean? Should this stop you from trading CFDs at FBS?
- In some jurisdictions, e.g. the EU and the UK, brokerage service providers offering CFDs must adhere to regulatory requirements that involve publishing appropriate risk warnings.
- These warnings serve to emphasize the high level of risk associated with CFD trading and inform retail traders about the possibility of losing money. Retail account loss percentages are disclosed to further highlight this risk.
- Nonetheless, being aware of and understanding these risks should not discourage you from CFD trading.
- Once you have a solid understanding of CFD trading, you should select a reputable broker that offers competitive fees.
- At BrokerChooser, we exclusively recommend providers regulated by trusted top-tier authorities, ensuring the legitimacy of these brokers.
So if you understand and are aware of the risks and know how to manage them, you should have no worries about trading CFDs at FBS.
75.2% of retail CFD accounts lose money
Keep reading to learn about the details of what these risk warnings mean, and how they are calculated. Also, find out whether FBS allows you to set your leverage manually, which can be key to limiting your risk.
What is the CFD risk warning?
CFDs are basically contracts you enter into with your broker in order to speculate on the price of an underlying asset, such as stocks, currencies or commodities. CFD trading is a high-risk activity that necessitates lots of market knowledge, risk management and self-awareness.
In certain jurisdictions, such as the EU and the UK, risk warnings are required by law. Financial regulators mandate including this risk warning in all information regarding FBS's CFD trading services.
Let's see the specific risk warning for FBS!
|Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.2% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.|
Data updated on October 24, 2023
The provided warning displays the proportion of clients who experience financial losses in relation to their CFD trading. However, it fails to consider the specific amounts these clients have either gained or lost through their CFD trading: were losses only a few dollars, and gains many thousands? Or the other way around? The risk warning contains no information about this.
Moreover, the warning does not provide information regarding the net position of the overall client base at FBS, including whether their cumulative accounts are in a positive or negative state.
The percentage indicated in the risk warning does not signify the likelihood of you losing money; rather, it emphasizes that CFDs are inherently high-risk products. Whether you make a profit or incur losses depends on factors such as your knowledge, trading skills, risk management strategy, and market fluctuations.
How is the risk warning calculated?
Let's take a closer look at what regulators expect financial providers to disclose.
In accordance with the original regulatory requirements set forth by the European Markets and Securities Authority (ESMA) in 2018 for the EU market, which were later adopted by most national competent authorities in the EU, the risk warning should incorporate an updated loss percentage specific to the broker. This percentage should be calculated based on the proportion of retail CFD trading accounts that experienced financial losses. This calculation needs to be performed every three months, considering the preceding 12-month period leading up to the calculation date.
According to ESMA's definition, an individual retail client CFD trading account is considered to have incurred losses if the overall sum of realized and unrealized net profits associated with CFDs linked to that account during the 12-month calculation period is negative. This includes any costs, charges, fees, or commissions related to the CFDs connected to the account.
The Financial Conduct Authority (FCA), the UK's regulator, has set similar rules for brokers it oversees.
How leverage works in CFD trading
Brokers offering CFD trading are required to publish risk warnings. While trading stocks with a stockbroker, you won't encounter a similar warning, even though retail clients in general may not be significantly more successful when trading stocks. However, the use of leverage in CFD trading increases its risk.
Leverage allows you to trade CFDs with a smaller investment, allowing for larger trading positions. It has the potential to magnify both profits and losses, making it a double-edged sword. Therefore, caution is advised when using leverage.
If you're interested in understanding the intricacies of leverage in CFD trading, you can read our expert article to learn more about the potential risks and rewards.
How to manage risk in CFD trading?
There are several steps you can take to limit your risk associated with leverage. Here are some tips.
- Establish realistic objectives. Conduct thorough research on the underlying asset and market, while also being mindful of your own behavior to avoid being carried away. Determine a profit target based on your analysis.
- Use stop-loss orders, which automatically close your position if the price of the underlying asset moves against you by a specific amount. This approach helps limit potential losses.
- Have a diversified portfolio. This is Investing 101, but is worth highlighting: don't put all your eggs in one basket.
- If your broker permits, set leverage manually. Leverage has the potential to enhance gains but also amplify losses. Be aware of the associated risks before using leverage. Typically, regulators establish a maximum leverage limit, and brokers often set leverage automatically. However, certain brokers allow users to manually adjust (reduce) the leverage, which can also help limit losses.
Fortunately, FBS lets you set your leverage level manually.
Looking for a CFD broker?
If you are looking for the brokers that offer the best CFD trading conditions, check our top recommendations of the best CFD brokers in the world.
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