CFD trades rise by 40%

The number of private investors trading contracts for difference (CFD) has risen by 40 per cent.

Trading numbers rose from 18,000 to 25,000 in the year to October 2010, according to global wealth researcher Investment Trends, which interviewed a sample of over 13,000 traders.

CFDs are derivative products that allow investors to make profit from price movements in shares or indices. Traders can benefit without buying the physical assets, and can use CFDs to profit when prices fall by taking short positions.

Retail investors have been attracted by the potential to make large profits in a short space of time, as CFDs allow them to place leveraged wagers on short-term price movements. This can mean huge profits, or heavy losses, depending on which way the markets move.

Analysts in the 2010 UK Financial Spread Betting & Contracts for Difference Report, said they expected a further 9,000 CFD traders to enter the market in 2011.

But earlier this year the Financial Ombudsman Service reported an increase in the number of complaints about CFD providers.

A review in 2010 had previously found that some stockbrokers advising clients on CFDs were inadequately qualified to do so.

The report links the rise to the increasing number of foreign exchange trading providers who have added CFDs to their product offerings, and the corresponding advertising push by providers of their existing CFD provision.

But for foreign exchange trading spread betting remains the preferred investment method, as investors seek to take advantage of global currency exchange volatility.

Just over a third of all spread bets comprised foreign exchange trading in the previous year study, but in 2010 the figure rose to 42 per cent of all spread bets.

However the report found that CFD traders had outperformed spread betters over the period, with an average return of 20 per cent, compared to 9 per cent and fewer reporting losses.