Table of contents:
- 1 What are CFDs? – Contract for difference explained
- 2 Scams from CFD providers:
- 2.1 How to avoid fraud in CFD trading
- 2.2 1. regulation of the provider is absolutely necessary
- 2.3 2. check the company behind the provider
- 2.4 3. avoid rip-offs through excessive fees
- 2.5 Beware of spammers and cold
- 2.6 Why CFDs are a serious financial product:
- 2.7 Conclusion: CFDs are not fraud with a reputable provider
- 2.8 Is CFD trading serious?
- 2.9 How does CFD trading work?
- 2.10 Does a CFD broker trade against the client?
Is CFD trading even serious? – This question is the subject of our guide. CFDs enjoy high popularity in Germany, but there are also fraud attempts by criminal online brokers. Are CFDs a fraud? How do you escape a fraud by CFDs? – these questions we answer in the following texts.
What are CFDs? – Contract for difference explained
CFDs (short for Contract for Difference) are also called contracts for difference. With these contracts, you can make a profit or loss on the difference or the price increase or decrease of an asset. They are over-the-counter contracts that are offered by many online brokers. There are separate markets for them, which are provided by market makers.
With contracts for the difference, you can very easily speculate on rising or falling prices. As an investor, you only own this contract, but not the underlying asset (for example a share). Therefore CFDs are also considered to be derivatives. For trading, leverage of up to 1:30 (EU regulation) is also offered.
The following markets are offered by CFDs:
- Currencies (Forex)
- Raw materials
- Crypto Currencies
Advantages and disadvantage of CFDs
Contracts for Difference are particularly popular with private traders because they are an easy-to-understand financial product. For example, you can use CFDs to make short sales (speculation on falling prices). It is also possible to trade CFDs with very little initial capital and take advantage of the benefits of leverage
In the following table I have summarized the advantages and disadvantages of CFDs:
|Trading with small capital is possible||Traders underestimate the risk|
|Short trades are easy to do||There are bad CFD Brokers|
|Trading with leverage|
|Professional trading platforms are available|
|Negative balance protection|
Scams from CFD providers:
From over 10 years of trading experience, our team and I have found out a lot of information and examples of CFD fraud. Users and traders also reported about it in our Facebook group or Youtube comments. Dubious CFD brokers are mostly located outside the EU or have no address at all. It is tried to enrich itself at the customer’s money.
Known cases of scams are manipulation of prices, not payout of funds, or demand hidden fees. Furthermore, dubious providers often use trained account managers who entice the customer to deposit. After that, the customer is persuaded to make unwise investment decisions or the account manager trades the customer’s account himself (prohibited by law).
Known fraud attempts from dubious providers:
- Price manipulation (stop loss hunting)
- Demand for hidden fees
- Pushy and dubious account managers
- No payouts of winnings or even client funds
- Prevents order execution
In general, you should learn about CFDs before you start trading because many traders simply blame the broker for losses even though they themselves have traded wrong. On this page, we try to inform you transparently and show you how you can avoid fraud.
How to avoid fraud in CFD trading
The focus in avoiding fraud is on choosing a good CFD provider. Contracts for Difference are an officially approved financial product, which was developed in 1980 by the British bank UBS in London. CFD brokers from Europe must be regulated by a financial regulator to offer this service.
We clearly recommend brokers that have one or more financial regulations here on this site. A fraud can be excluded with regulated brokers. Before registering, check the provider’s website carefully.
1. regulation of the provider is absolutely necessary
Trade only with regulated CFD brokers. Dubious CFD brokers get an official financial regulation, as this would be immediately withdrawn after a few complaints. On the website of the broker, the regulation can be checked very easily, because it must be presented in the footer (bottom of the website). But often the provider is also directly with the various licenses and you can find more information about the regulation on the menu.
A regulation and license radiates trustworthiness at the same time and can only be obtained through strict regulations. Well, known regulations in Europe are for example:
- FCA (United Kingdom)
- CySEC (Cyprus)
- BaFin (Germany)
Often large CFD providers have several licenses and branches worldwide. These branches are then regulated accordingly in the countries. In summary, a regulation should definitely be given. Fraud can be excluded. The regulation of the broker can be checked on the websites of the authorities
2. check the company behind the provider
Unfortunately, there are also providers who feign regulation. These incidents are rather rare, but they do exist. An address of the company should be visible on the website. Besides regulation, this is the second important point you should pay attention to. Where is the company located and is it even real? Check the address of the broker.
3. avoid rip-offs through excessive fees
High CFD trading fees are not directly a scam but can end up in an unbearable rip-off. Especially inexperienced beginners fall for dubious providers. In addition to trying to steal the customers’ capital, a fraudulent broker often demands too high trading fees. Inexperienced traders can often estimate the fees badly.
Before you register, check what trading fees there are and how high they are. Most traders charge a commission or a spread. These are fees that are charged per trade. Under CFD Trading Fees you can also read more about this. In the table below you will find an overview of the average spreads of a good provider
|EUR/USD||1 pip (0,001 points)|
Beware of spammers and cold
Dubious providers also often work with spam and cold-call calls. I get these annoying calls even weekly because my phone number is in the imprint of several websites. You should not underestimate these calls. If you get involved in a conversation, the caller will not leave you alone and will try to contact you again.
The calls often start with an opening question or with the sentence “I have seen you are registered with us”. Do not answer such foreign callers and block the number. Dubious CFD brokers sometimes buy databases with numbers of prospective traders. These are then called off. Never listen to the instructions of such cold-call calls and hang up immediately!
Why CFDs are a serious financial product:
On the Internet, you can read again and again that CFDs are a dubious financial product and that traders can only lose money with them. This is partly due to rip-offs or dubious online brokers. Some coaches even make CFDs bad to sell their own coachings for other financial products. Please check the facts for yourself. In the following text I would like to give you an insight into how CFDs work.
One reads again and again about the fact that the CFD broker trades against his own clients. This does not happen with serious and large providers. On the homepages, it is clearly communicated how a CFD broker earns his money. Trade against the customer is forbidden and is excluded. Moreover, it would be a much too high risk for the broker.
The broker usually forwards a trader’s orders to a liquidity provider (market maker), which sets the prices and rates. These are usually large banks or institutions with the appropriate licenses. Larger CFD brokers also act as liquidity providers and cooperate with other providers. The broker then shares the trading fees with the liquidity provider.
A CFD broker earns his money by charging an additional spread (the difference between the buy and sell price), a trading commission, or a swap (overnight financing fee). Before opening a trading position, the fees are usually displayed.
Contracts for difference are leveraged derivatives. You need a security deposit (margin) for a position, which is multiplied by the leverage. Our recommended CFD Broker Plus500 will communicate all fees transparently with you. Plus500 makes money by adding a spread to the real market. In the oil example, there is a spread of 0.02 points.
So when you open or close the position, there is a “fee” of 0.02 points. The spread only means that the order will be executed at “worse” prices and the broker will earn his fee by the difference to the normal market price. There may also be a financing fee for the position overnight. CFDs are leveraged derivatives and this leverage must be financed.
Often a CFD broker borrows capital from other banks and lends it to his traders at higher interest rates. He makes a profit on an interest margin. In summary, CFDs are a serious and regulated financial product. The broker hedges the positions through liquidity providers in the background.
- Regulated and serious CFD brokers do not trade against the trader
- The orders are passed on to liquidity providers with the appropriate licenses
- The broker earns his money through trading fees
Conclusion: CFDs are not fraud with a reputable provider
On this page I have informed you about the financial product CFDs and the fraud attempts of dubious online brokers. Contracts for Difference are considered a very safe financial product for the private trader as long as he trades with a regulated provider. Therefore, before you register, please check the company you want to register with.
For investments and capital-intensive transactions, the following always applies: Do not trust any third-party account managers but only yourself. You have to protect your capital from fraud yourself and this guide from Finanzanalyst.de will help you do this. In summary, the CFD trade is to be classified as serious. It is trading with leverage on falling or rising prices with the help of a contract for difference.
Is CFD trading serious?
Yes, CFD trading is reputable with a regulated provider. Make sure to check the company data and license before registration. Regulated CFD brokers operate to the highest security standards.
How does CFD trading work?
CFDs (contracts for difference) are leveraged derivatives. You can speculate and invest on rising or falling prices. The broker provides you with the trading platform and market data. You can test the trade yourself with a demo account or a small minimum deposit. The trade works via the order mask in the trading platform. There you can buy and sell assets with any position size.
Does a CFD broker trade against the client?
No, speculation against the customer would be much too risky. A CFD broker forwards orders to liquidity providers and earns his money through trading commissions. The higher the trading volume of the trader, the more money the broker earns.
Read my other articles about CFD Trading:
- 10 CFD Trading mistakes
- 7 important CFD Trading Tips & Tricks for beginners
- Advantages of CFD trading: Why you should start
- Bitcoin CFD Trading Tutorial
- CFD Broker deposit protection – How safe is your money?
- CFD Broker with negative balance protection & Margin Call
- CFD Brokers: Market Maker And DMA Broker In Comparison
- CFD Trading costs and fees
- CFD Trading Demo Account Comparison | Test for free
- CFD Trading indicators
- CFDs vs. Micro Futures – Which one is better?
- Criteria for a serious CFD Broker – Eliminate scam
- How does a CFD Broker really earn money?
- How to find a good CFD Broker
- Is CFD Trading legal? – avoid scams
- Learn CFD Trading – Basic tutorial for beginners
- My real CFD Trading experience that Can Make The Entry Easier
- The 10 best CFD Brokers
- The key figures of a successful CFD Trading Strategy
- What are Stock CFDs | Explanation & Tutorial
- What is CFD Trading Leverage | Explanation
- What is CFD Trading? – Ultimate Guide For A Profitable Start