Hedging Exposure on CFDs

sipps.html">Go back to Self Invested Personal Pensions

Most CFD providers automatically hedge their exposures to client positions in the underlying cash markets, which means they should not be unduly exposed to adverse market movements. This makes it highly unlikely that a CFD provider would go into liquidation, especially since most are highly capitalised and form part of larger financial services groups.

Should the worst happen, then clients of an authorised CFD provider facing liquidation and unable to pay the money it owes may qualify for compensation under the financial services compensation scheme. This operates to a ceiling of £50,000 with claimants receiving the first £30,000 in full and 90% of the balance, making a total of £48,000.

Trading Advice

The majority of CFD accounts are operated on an execution-only basis, with the trading decisions left entirely in the hands of the individual concerned. Most companies will however distribute some research to clients, most commonly in the form of a technical analysis report identifying the major support and resistance levels in the key markets. For those wanting more specific trading advice there are a number of CFD providers that are regulated and authorised by the FSA to operate full advisory services.

Clients who sign up for an advisory service receive professional help and advice to support their trading decisions. Generally this will entail having access to a designated advisor who understands their investment objectives and level of experience and who (within this framework) is able to make specific trade recommendations - usually on either the major market indices or large cap equities. The advisor may also be charged with keeping clients abreast of significant relevant events such as major economic news or specific company announcements.

The majority of CFD
accounts are operated on
an execution-only basis, with
the trading decisions left
entirely in the hands of the
individual concerned.

Advice on Call

Generally the advice is quite flexible and could, for example, take the form of an e-mail or telephone call. Clients are also free to ring during market hours for advice on any open positions or trades that they are considering, including how to get the best entry and exit prices. Most advisory services will even monitor the positions and execute the appropriate limit and stop orders. Alternatively, where the advisor identifies a suitable opportunity he can take the initiative and call the client to discuss the possible trade.

The aim of an advisory service is to assist the client by providing as much or as little advice as he wants in the form that suits him best. This could be anything from helping him develop a suitable CFD trading strategy to making specific individual recommendations. One issue with these services is that, given the nature of the CFD, the provider is inevitably giving advice in relation to transactions in which it is a party. Because of this the FSA stipulates certain rules and regulations to manage this conflict of interests.

Advisory services are usually paid for by way of higher commission levels on accepted trades and may be restricted to clients with more substantial funds. Some CFD traders will find this type of arrangement attractive but ultimately it demands a fair degree of trust. After all, nobody is infallible and any losses fall directly to the client just as they would in an execution-only service.