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Breaking Down Contracts-For-Difference

A variety of study material to help you learn about contracts-for-difference (CFDs)
A CFD is a type of financial contract that gives you the right to buy and sell at specified prices.

The BC Securities Commission (BCSC) is seeing more Contracts-For-Difference (CFD) offered by unregistered individuals or firms over the Internet.

In this blog post, we describe CFDs and help investors identify possible CFD schemes offered over the internet.

What are Contracts-For-Difference (CFDs)?

A CFD is a type of derivative whose values are determined by the change in the market value of some underlying instrument – such as a share, index, market sector, currency, or commodity – without acquiring ownership.

The contract is generally designed to pay out in cash, and it is typically intended to be a speculative investment marketed towards an individual investor or speculator.

CFDs are leveraged investments as they are designed in a way where a small change in market value can result in a relatively large change in the value of a position, particularly considering the amount required to be deposited upfront.

CFDs are also typically intended to be a short-term investment – as little as a few hours.

Yes, it is legal to sell CFDs in Canada. However, in order for a dealer to sell CFDs in Canada, it must be registered with the Canadian Investment Regulatory Organization (CIRO). 

The only exception to this is CFD dealers that are selling to a client who isn’t a retail client and meets the legal definition of “qualified party”. The majority of CFD dealers do not fall under this exemption because the majority of CFD customers are retail investors who want to speculate.

The investment dealer division of CIRO has a list of the registered dealer members on its website.

What to Keep in Mind When Purchasing a CFD

CFDs are high-risk investments that can lead to investors losing most or all of their investment quickly. Here are some more things to think about if you are considering investing in CFDs.

  • The CFD dealer must be registered with CIRO. Always check to see if a CFD dealer is registered. Unregistered persons cannot sell CFDs to B.C. residents. If an unregistered firm or individual approaches you, report it to the BCSC immediately.
  • CFDs are highly volatile. You can lose a lot of money in a short period of time.
  • A CFD is a high-risk and highly-leveraged: you pay little up front as margin, but small changes in the underlying instrument can result in big changes for the investor.
  • CFDs are generally instruments used for short-term speculation, not long-term investment.
  • Read and understand the terms of the investment contract, and if you have any questions, ask before signing.

Be Wary of Investment Fraud

Similar to binary option schemes, fraudsters offer online “opportunities” to invest in schemes referred to as Contracts-For-Difference or CFDs that offer unrealistic returns.

People investing through these websites should know the trading may not be real; the websites may claim that the CFDs have lost money when they have not; or, the website may simply never return an investor’s money.

Investors should also look out for:

  • Registration status: You have certain protections from fraud when doing business with a new CIRO dealer member; check the firm’s status by using the National Registration Search or searching on CIRO investment dealer division’s website.
  • No presence in Canada: A dealer needs to have a presence in Canada to be registered with CIRO; if the company is operating from offshore, report it to the BCSC immediately.
  • Complex terms and labels: Fraudsters tend to pick labels and terms that are complex. If there is any confusion, ask for clarification. If you cannot get clarification, please contact BCSC Contact Centre.

Report a Concern

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Contact Centre at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.

InvestRight.org is the BC Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.

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