Who trades CFDs? - Retail Traders or Institutions?

Q.: Who trades CFDs?

A: CFDs appeal to a broad range of users for different reasons and the people trading in CFDs range from sophisticated retail traders to day traders, to mums and dads. Hedge funds, institutions and wholesale clients are also known to make use of CFD trading and the market is still growing.

Eva Diaz communications manager CMC Markets is quoted saying that that people in CFD trading fall into three groups:

• Lifestyle reasons. Diaz says many people trade in CFDs for lifestyle reasons. 'For example I interviewed one CFD trader who used to be a mid-wife for 26 years. She was getting tired of shift work so she said that maybe trading in CFDs was something she could do that would allow her to spend more time with her family. She spent two years educating herself in the market, attending seminars and share trading. Now she is fulltime CFD trading.'
• Main source of income. Diaz says there are some people who do CFD trading as their main source of income. 'For example one guy trades CFDs from the open of every day's trade to the close, as well as trading in some of the other markets in different time zones. He has a mini trading desk in his office with 10 monitors in front of him as he trades.'
• Business people. Diaz says, 'One or Two people that I interviewed have other businesses. They get extra income from trading. Many of them work from home and monitor the market anyway, so they decided to trade in CFDs. For example there is one man in Bathurst NSW who used to own a petrol station and the IGA (supermarket) but he was not making enough profit, so he decided to learn how trade in CFDs. These are people who want extra income.'
• Finally Diaz says traders with experience in derivatives also like CFDs. 'There are also a handful of traders who used to trade in options and warrants but now prefer CFDs. When they discover CFDs it's a breeze for them,' Diaz says.

There has been a big shift since CFDs arrived in the market. The number one shift is in the attitude to CFDs. In the early days of CFDs, the people who used them were the early adopters - advanced traders who had been in the market for a long time. It is getting more mainstream now. More people are open to it now and contracts for difference have gone mainstream now.

Q.: What makes a suitable investor?

A: Ideally you should have some experience prior to trading any leveraged trading. Contracts for difference are also likely to appeal to more adventurous investors who are comfortable trading in and out of volatile markets.

I frown when I go to trading exhibitions and find a number of CFD providers touting to absolute newbies. Sure, CFDs can be very rewarding when a trader has knowledge, skill, discipline and time on his side and when contracts for differences are used in the appropriate market. However, one needs time to train and develop discipline; CFDs will be there 6 months from now so what's the hurry?

Thus, in practice, investors with prior trading experience and who are familiar with money management are more likely to choose CFDs as a speculative choice.

Q.: Is it ok for a novice to invest in CFDs?

A: The simple answer is no; ideally you should have some share dealing experience. And another thing - start small to build confidence. I didn't start small to begin with because I'd already been share dealing for a while and so didn't really want to waste time with tiny trades.

CFDs are geared speculative products and difficult in a market like we experienced for instance in 2008. If you get it right sure you make a lot of money. But if you get it wrong you fall dramatically. And the problems we have experienced in the market with sub-prime and CFOs collateralized debt obligations and all the problems at Bear Stearns were all because of over-leverage. In other words people borrowing on borrowings on borrowings to take a punt.

 ...Continues here - Difference between Investors and Speculators