cfd's any traps i should know?, page-6

I'd like to add that trading specs can be pretty risky with CFD's for many reasons.

Let's go through it hypothetically with Dragon Mining, because DRA has a big enough market cap to be included as a CFD on IG Markets.

Let's say you buy long DRA when it was 20c.

For DRA you have to deposit 15% of the total.

So, you decide that because it's a spec you don't want to risk alot, so you buy $10,000 worth of DRA and only pay $1500 to be able to do so.

This will cost you about $30 in fee to buy, and then $30 to sell.

But, with a spec like DRA there is NO GUARANTEED RISK PREMIUM ... a fancy way of saying no guaranteed stop loss, so if they can't sell it on your behalf then they will not guaranteed the price you asked it to be sold at.

Profit for each cent put on by DRA is 1/20 * 10000 = $500 per cent (same amount lost per cent obviously)

Now, let's say that you set your stop 15% lower so that you lose no more than your premium (disregarding the broker fees). So ... you set it at 17c.

Now, let's say DRA tumbles 3c and reaches your stop loss of 17c. The selling momentum is large enough that it means that you are forced to get it sold at 16c.

So ... you have now gone from having a $1500 deposit, through to owing the CFD provider $500 ... which is a $2000 loss!

Point is? ... be careful about volatile stocks with low prices because as little as a 2 or 3c decline in their sp can whipe out all your money on that trade and end up with you owing money... and just due to volatility alone small companies can move around a fair bit in just a day. I've only had my fingers synged by this, but it's enough for me to learn that I don't want to get burnt!