Risks of trading CFDs

Before you decide to trade CFDs, we want you to know about the possible risks.

Trading 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 CMC Tracker PDS (PDS) covers the risks of trading CFDs on our CMC Tracker platform in more detail. Make sure you read it before you open a CFD account.

You can lose more than your initial deposit

The amount of any loss for an individual trade may exceed the amount of margin that you used to enter into that trade. This is a feature of ‘leveraged’ or ‘margin’ trading – you can lose more than your initial payment.

The higher the leverage, the bigger the risk

The impact of any price movement on the funds in your account will depend on the size of your trade, not the amount of margin. A small movement in price may have a large impact on your account if you have made a large trade. This is the main reason the new CMC Tracker platform now allows you to choose the amount you wish to leverage instead of locking you in to maximum exposure: you can easily dial leverage up or down for each transaction.

More about risk

1. Leverage

See Section 10.10 of the CMC Tracker PDS

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

See Section 10.5 of the CMC Tracker PDS

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 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

See Section 10.10 of the CMC Tracker PDS

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 financing costs. You’ll incur these financing 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 financing costs may exceed the amount of any profits or significantly increase losses.

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

4. Risk of close-out

See Section 10.14 of the CMC Tracker PDS

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:

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

5. Counterparty risk

See Section 10.4 of the CMC Tracker PDS

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.

Before entering into a relationship with a new hedging counterparty CMC Markets undertakes a due diligence process in accordance with our hedging policy, which is available here. CMC Markets hedges its exposure to customer positions with CMC Markets UK plc. CMC Markets UK plc in turn hedges with approved counterparties such as Barclays Capital, Deutsche Bank and JP Morgan.

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

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

See Section 10.5 of the CMC Tracker PDS

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 ASX. 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.

7. Market volatility

See Sections 10.1 and 10.2 of the CMC Tracker PDS

The ability of our CMC Tracker 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 CMC Tracker 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 Tracker 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.

8. 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 the CMC Tracker PDS (PDS) carefully and obtain independent financial, taxation and other professional advice concerning the PDS before you apply to open a CFD account with us. Trading in CFDs carries significant risks, and we can’t offer advice or guarantee results.

Trading in CFDs carries significant risks, and we can’t offer advice or guarantee results.

9. 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 Tracker 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 Tracker 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.