The Virginia SCC encourages investors to be cautious if approached by an individual or company that claims to trade in contracts for difference (CFD).
A CFD is an alternative to traditional financial instruments used to speculate on financial markets. It is a type of derivative contract between a buyer and a seller where the parties to the contract speculate on what the price of an underlying asset will be at a specific time. If the value of the asset increases at contract time, the seller pays the buyer the difference. If the value of the asset falls at contract time, the buyer pays the seller the difference.
CFDs are typically available only to very high net worth and experienced individuals or institutional investors. They are not traded on major exchanges, but trade over-the-counter through a network of brokers. CFDs allow investors to trade the price movement of many securities including exchange-traded funds, stock indices, and commodity futures. CFDs use leverage or margin allowing investors to put up a small percentage of the trade. Even when purchased through the most reputable dealer, CFDs are extremely risky and you could lose some, all or more than your initial investment.
State securities regulators are concerned that CFDs may be marketed to retail investors by scammers looking to make a quick profit. Ron Thomas, director of the SCC’s Division of Securities and Retail Franchising, encourages Virginians to be wary of any investment opportunity that sounds exotic or too good to be true. “Before making any financial decisions, ask questions, do your homework and make sure an investment and the person offering it are licensed or registered,” he said.
As with any investment opportunity, Thomas recommends that investors consider the following:
- Remain cautious of opportunities promising high returns with little or no risk.
- Be skeptical of unsolicited emails, letters or phone calls and high-pressure sales tactics involving investment opportunities.
- Be wary of complex investments and offers that you do not understand.
- Get details of any investment offer in writing.
- Exercise caution if asked to wire money offshore.
For questions about investments and the people offering them, contact the SCC Division of Securities and Retail Franchising at 804-371-9051 or toll-free in Virginia at 1-800-552-7945. You may also visit the division’s website at www.scc.virginia.gov/srf/index.aspx. To learn more about contracts for difference, visit the North American Securities Administrators Association’s website at https://www.nasaa.org/52192/informed-investor-advisory-contracts-for-difference/.
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