Reducing the Risk of Contracts for Difference

Every kind of investment carries with it some kind or amount of risk and Contracts For Difference are no exception. In fact, they could be considered as a high risk investment because you can easily lose more than you invest. However, there are ways to mitigate this risk somewhat and one particular way is to use what is known as a Stop Loss Order.

The Stop Loss Order can be set to whatever you choose. For instance you may buy cfds at $3.00 each and set the Stop Loss Order at $2.60. A stop loss order signals the cfd provider to close your position so that you do not sustain further loss. Unfortunately such stop loss orders can be slow in going through if there is a rush of like orders. And in the case of a dramatic and quick fall where liquidity is in short supply, you may still lose a great deal more than you intended. This is more of a problem on equity prices than indices and currencies that usually experience very active trading.

However you can also have what is known as a Guaranteed Stop Loss Order (GSLO), if your cfd provider offers it. You have to pay an additional charge for this benefit and there are certain restrictions imposed, but it is better than being subject to large losses if the market moves against your plan. So if you are planning to get into investing with cfds it is wise to find out all about how you can best reduce the risks inherent in such a product.