To trade CFDs you will need to open an account with a CFD provider. CFDs differ from shares because you don’t own shares when you buy a CFD. As a result you are not entitled to vote at shareholder meetings, although many CFD providers allow you to participate in corporate actions (dividend payments, share splits, rights issues etc).
CFDs are an over the counter derivative product and are not mostly not exchange traded. The buying and selling of CFDs can only be conducted through a CFD provider. As such, you can only buy and sell CFDs from the CFD provider, not a third party.
In order to be accepted by a CFD provider as a client, you have to meet certain minimum criteria.
This includes minimum savings and earnings but also minimum levels of experience. In other words you have to be appropriate…(good enough).
A CFD broker won’t open accounts for just anyone.
What does that mean?
Apart from knowing your arse from your elbow, you have to know information and answer questions such as:
If you buy and the price goes down, you will suffer a loss. Do you understand this?
Have you traded before?
If so, how often?
What is a bid?
What is an offer?
Do you understand what margin trading involves?
The CFD provider is obliged to make sure you are appropriate and know what you are doing. You see, CFDs are not to be traded by everyone and investors should have a good understanding of how the product works. They do this by offering ‘demo simulators’ and a range of educational classes such as seminar or the more recent ‘Webinars’.
Questions about the possibility of margin calls, and the understanding that you can lose more money than you put in, as well as the speed of stock market trading, do mean some potential investors are deemed unsuitable. Ayondo for instance vets its potential clients and rejects about 10%. Trading experience, savings and earnings plus understanding the product are all included in the suitability test.
However, do keep in mind that playing around with a demo money or attending seminars won’t make you money per se’, making money comes with experience, patience and with a good trading plan.
The appropriateness ‘rule’ is necessary because 1) CFDs are traded on margin and you can lose more than your deposit if you are careless 2) too many inexperienced people opened up CFD trading accounts and lost their monies before they could even understand the rules of the game. That’s not right, is it?
I once read a story about a heavy ‘pit trader’ with the nickname of ‘Frenchie’ from the Financial Futures trading floor, and what he did after the ‘open outcry’ system migrated to ‘screen trading’. Frenchie wasn’t really savvy at all with computers so he tried to place his orders by shouting into the mouse, now if you knew Frenchie or the the trading floor, and imagined him doing this in a proprietary trading room, you would find this quite funny!
But the real story is that Frenchie ended up losing loads of money from not understanding the very simple process of placing an online trade! What they won’t tell you is how to make money!
