CFD Trading in the United Arab Emirates
In the United Arab Emirates (UAE), investing money in contracts for difference (CFDs) is actually more common than investing in genuine assets that are listed on the stock markets.
- Retail Investors are everyday people who are not professional traders or investors and live in the United Arab Emirates (UAE).
- Residents of Dubai and Abu Dhabi in particular have a strong preference for trading CFDs by opening an account with a CFD broker that is either based in Dubai or Abu Dhabi or is located outside of the United Arab Emirates.
What exactly are CFDs?
According to Investopedia, a contract for difference (CFD) is a contract between a buyer and a seller in which the buyer agrees to pay the seller the difference between the current value of an item and its worth at the time of the transaction.
This difference is calculated by subtracting the value of the item at the time of the transaction from the current value of the item.
If an investor trades CFDs on a company's stock, does that investor truly own the company's stocks?
No, a CFD investor never actually owns the underlying asset or the security; rather, he or she makes a profit (or suffers a loss), depending on how much the asset's price changes over the course of the contract.
What are the benefits of trading CFDs or having your own position in them?
CFDs make it possible to gain access to the underlying security asset at a cost that is lower than the cost of buying it directly.
- In addition, CFDs make it possible to go long or short on the underlying security.
- For equities that have limited liquidity, for instance, shorting may not be an option; however, this limitation does not apply to the corresponding CFD.
- CFDs provide a higher level of leverage than other types of trading.
- The CFD market has regulations in place for the standard leverage.
- The maintenance margin used to be as low as 2 percent (with a leverage of 50:1), but currently it is limited to 3 percent (30:1 leverage) and can reach as high as 50 percent. (2:1 leverage).
What are some of the drawbacks associated with trading CFDs?
CFDs have the disadvantage of instantly lowering an investor's initial position, which is dropped by the size of the spread upon opening a CFD trade.
- This is a significant disadvantage of CFDs.
- Trading contracts for difference (CFDs) exposes investors to a number of additional risks and hazards, some of which include a lack of industry oversight (a regulatory weakness, given that the majority of CFD brokers are market makers), the possibility of a lack of liquidity, and the necessity of maintaining an acceptable margin.
- Although it is possible to register an account for CFD trading with as low as one thousand Dirhams at any reputable online CFD broker, it is possible that CFD trading is not appropriate for UAE traders with an investment capital of less than one hundred thousand AED.
Is CFD trading halal?
The level of religious observance an individual possesses is the primary factor in determining whether or not trading CFDs is permissible under Islam.
- The majority of Sunni and Shia Islamic scholars, as well as those affiliated with the Hanafi, Shafi, Hanbali, and Maliki schools of thought, do not have a problem with CFDs or other financial products.
- On the other hand, a minority of Sunni and Shia Islamic scholars prohibit any form of participation in the financial markets that involves interest or riba.
By the way, the majority of brokers in the modern day provide interest-free or riba-free CFD and Forex trading accounts.
These accounts are comparable to the financial products that are made available through Islamic banking in the UAE.
Therefore, if one considers it from a religious point of view, there is not much of a problem there.
Please keep in mind that not everything in this day and age can be viewed and experienced through the prism of one's religious views. Considering this is extremely important. In life, it is essential to be as realistic as possible. Therefore, trading CFDs ought to likewise be considered within the same framework.
Which nations have made CFD trading illegal?
Trading in contracts for difference (CFDs) has been made illegal by the governments of both the United States and Brazil.
Is it permissible to engage in trading CFDs in the UAE?
Yes. At this time, the United Arab Emirates does not have any laws that restrict its citizens from engaging in online CFD trading.
Which nations have passed legislation to legally permit trading in CFDs and also regulate this product?
As an over-the-counter (OTC) financial-markets product, contracts for difference (CFDs) are recognized in a number of significant trading nations, such as the United Kingdom, Germany, Switzerland, Singapore, Spain, France, South Africa, Canada, New Zealand, Hong Kong, Sweden, Norway, Italy, Thailand, Belgium, Denmark, and the Netherlands.
These nations also include the United States of America. Brokers that sell contracts for difference (CFD) trading products are subject to regulation from each of their respective governments.
When trading CFDs, do new or inexperienced investors run the risk of losing money?
Yes. In point of fact, more than eighty percent of people that invest in the CFDs end up losing all of their money in the long run.
- This particular financial instrument is not appropriate for the pursuit of long-term investing objectives.
- Additionally, one must under no circumstances invest any money in the CFDs that is not money that can be easily replaced.
- Trading contracts for difference (CFDs) is typically considered to be acceptable for wealthy investors in the UAE who are able to lose a significant amount of money in the financial markets without necessarily experiencing any adverse effects on their personal life.
Do brokers of CFDs engage in dishonest practices?
When opposed to a conventional broker that exclusively trades in securities that are listed on a stock market, the chances of getting ripped off by a CFD broker are significantly increased.
Because the majority of CFD brokers act as market makers, they have the ability to manipulate the pricing of the underlying CFDs at any moment to their own benefit. This may turn a winning trade for an investor into a losing one.
What fees are involved in trading contracts for difference (CFDs)?
In general, there is no commission charged while trading currencies and commodities.
On the other hand, brokers will often take a commission from
the sale of stocks. For example, the financial services company CMC Markets,
which is based in the United Kingdom, levies fees beginning at 0.1 percent,
which is equivalent to $0.02 per share, for U.S. and Canadian-listed shares.
You will be charged a fee for each trade, as the opening deal and the closing deal are considered to be two separate transactions.
Do I have to pay a price to keep my CFDs overnight if I choose to do so?
Yes. Due to the fact that overnight holdings in CFDs are considered investments, you may be required to pay a finance fee if you maintain a long position (and the provider has lent the trader money to buy the asset).
When a position is held open for an extended period of time, traders frequently accrue interest charges.
How exactly does a trade in a CFD take place?
Investopedia provides the following illustration of a contract for difference trade:
- Consider the following scenario: a trader acquires 100 shares of a stock at the ask price of $25.26 per share.
- The total cost of the transaction will be $2,526. (plus any commission and fees).
- For this transaction, a typical broker demands that you have at least $1,263 in free cash in a margin account that is set to 50 percent, while a CFD broker just requires a 5 percent margin, which comes to $126.30.
- When you make a trade in CFDs, the amount of money you lose is proportional to the magnitude of the spread that is in effect at the time of the deal.
- If the spread is $0.05 cents, then the stock must increase $0.05 cents in order for the transaction to result in a profit.
- If you had acquired the stock directly, you would have realized a profit of $0.05; but, in addition to this profit, you would have incurred a fee and had a higher expense in terms of capital.
- If the stock climbs to a bid price of $25.76 in a regular broker account, it is possible to sell it for a profit of $50, which when divided by $1,263 results in a profit of 3.95 percent.
- When its associated stock exchange, however, reaches this level, the CFD bid price may drop to as low as $25.74.
- The trader is required to quit the position at the ask price, and the spread is larger than it would be on a regular market, thus the profit from the CFD will be less.
- In this scenario, the return on investment for the CFD trader is expected to be 38 percent, which is equal to $48 divided by $126.30.
- The CFD broker may also require the trader to make the initial buy at a higher price, for example $25.28, in order to avoid losing money.
- However, the profit of $46 to $48 from the CFD transaction is considered a net profit, but the profit of $50 from owning the stock outright does not take into account any fees or other expenditures. As a direct consequence of this, the CFD trader now has a greater amount of money in their possession.
Should you trade CFDs or should you avoid doing so?
Trading contracts for difference (CFDs) comes with a number of benefits, such as reduced margin requirements, easy access to markets all over the world, legal exemption from shorting and day trading, and cheap or no transaction fees.
- A high level of leverage, on the other hand, magnifies losses when they do occur, and the requirement to pay a spread in order to enter and close positions can be expensive even when there are no significant shifts in price.
- In point of fact, numerous financial authorities from across the world, such as the European Securities and Markets Authority (ESMA), have established various limits on CFDs in order to protect the financial assets of ordinary investors who are not very knowledgeable.
Which online CFD trading platforms offer the most favorable conditions for investors residing in the UAE?
Olymp Trade; IG Markets; Avatrade; Plus500; City Index and CMC markets are often considered as the best online CFD brokers, by many professional investors and beginner traders living in the United Arab Emirates.
Reviewed by Arpita Singh
Arpita Singh is the main writer at ForexBroker.ae. As a senior investment professional with 10+ years of experience working at top-tier Private Equity and Sovereign Wealth Fund; she is also responsible for fact-checking concepts, reviews, and related details about brokers and exchanges listed on this website. Full Bio.