Are CFDs a scam?

[noob investor]

hi, im new to investing so some of my questions will sound dumb

i watched this and got the impression cfds are issued by brokers themselves, and brokers have software that determines if a trader is a loser or winner, and they just buy the cfds of losing traders, and follow the trades of winner by buying the real share. isnt this just pure gambling? it does nothing for the real financial markets, no liquidity or investment is provided to real companies, it sounds like brokers are a casino in this case and cfds are the slot machine. or am i misinterpreting something big?

 

[cynic]

hi, im new to investing so some of my questions will sound dumb

i watched this and got the impression cfds are issued by brokers themselves, and brokers have software that determines if a trader is a loser or winner, and they just buy the cfds of losing traders, and follow the trades of winner by buying the real share. isnt this just pure gambling?

That would depend upon one's definition of gambling!

It is, however, essentially a zero sum game where one party seeks to profit from the losses of the counterparty to their trade (and vice versa).

it does nothing for the real financial markets, no liquidity or investment is provided to real companies, it sounds like brokers are a casino in this case and cfds are the slot machine. or am i misinterpreting something big?

That depends upon the CFD type and/or the CFD provider's business model.

The DMA (Direct Market Access) CFD will, by definition, always result in a corresponding position, in the real market of the underlying asset/instrument.

The OTC (Over The Counter) CFD provider, as counterparty to their clients' trades, may choose to mitigate their risk, by hedging some of their net exposure, via placement of correlated derivative trades in the real financial market.

An opinion piece (that some may find interesting), comparing ASIC's governance of the industry, with that of a number of overseas regulatory bodies (i.e. CySec, FCA,etc.) in respect to fair pricing (or lack thereof) and management of client monies:
https://financefeeds.com/cfd-regulation-global-impact-comprehensive-guide/

 

[So_Cynical]

As i said many years ago a little after i first found out about CFD's - the brokers are basically bookies and they cover their bets just like any good bookie would, of course modern bookies have access to analytical software and know the clients that win and know the ones that lose.

Are there any DMA brokers? i thought comsec and the rest stopped trading them?

 

[Joules MM1]

this week i av been mostly cannibilzing and annoying .......yass !!

 

[cynic]

As i said many years ago a little after i first found out about CFD's - the brokers are basically bookies and they cover their bets just like any good bookie would, of course modern bookies have access to analytical software and know the clients that win and know the ones that lose.

Are there any DMA brokers? i thought comsec and the rest stopped trading them?

Apparently IG Markets and FP Markets still offer DMA CFDs (there might be others, so it may prove prudent to DYOR).

There used to be a limited range of exchange traded CFDs offered by the ASX. I briefly traded one of those instruments through Commsec, however those products were discontinued several years ago:
https://www.asx.com.au/products/cfds.htm

 

[Joules MM1]

2hours n 2 minutes of self promotion .....get good at skipping thru these things

 

[brisman]

Most lose money trading CFDs and most don't have the training and expertise to profit from trading. For example you need to know how to position size. But IB also offers CFDs with low costs and so if you pick the direction of a stock or market and buy and sell at the right time there's no reason why you couldn't make money with CFDs.

 

[aus_trader]

I agree with brisman. It's not a scam but a dangerous instrument (due to leverage) that if used carefully can help with your investments.

For example if you have a set of stocks that you want to hold for the long term, it is possible to hedge the long positions of those stocks using CFD's. By hedging I mean you can take either individual short term short positions using share CFD's or short a few index units during a market downturn. That way you can hold the long term shares right through the downturn but use the short CFD positions to offset the losses during the downturn.