Financial market observers noted that unlike traditional investors, millennials and Gen Zs have shown more interests in trading with financial derivatives. Envestnet Yodlee, a software and data aggregation company reported that a large number of unemployed millennials who received stimulus checks,,have been using the funds for derivatives trading. The latter being a more affordable option over buying shares of stocks and other investment assets.
E*Trade Financial Corp disclosed that more than half of the younger generation who took interest in derivatives trading are participating quite frequently, as many were able to make notable gains. Unfortunately, there were also serious losses particularly among amateurs, who as first time traders,were not fully aware of the underlying risks of this type of trading, particularly the most popular instrument known as Contract for Difference a.k.a. CFD.
CFD Trading in the U.S.
Trading with CFDs in the U.S. is not recognized as legal because the U.S. SEC as well as the U.S. Commodity Futures Trading Commission (CFTC), do not approve of their inclusion in the country’s financial markets. Still, most American millennials and Gen Z investors use the mobile trading app Robinhood, which offers CFDs as Options Trading.
Trade Nation’s observation is that trading with derivatives like CFD is not the best way to start one’s initiation into the world of financial trading. Mainly because it involves the use of confusing terminologies and the payment of numerous hidden costs.
CFD Trading in the UK and in Some EU Countries
Among European millennials and Gen Z traders, CFDs have gained traction as a popular financial derivative not only because several countries like the UK, Spain, Germany, Italy and Cyprus allow CFD trading. That is, as long as brokers and operators of trading platforms comply with UK and/or EU regulations
Of particular importance is the Markets in Financial Instruments Directive II, which requires brokers to set up a separate deposit account for customer funds. The directive also limits margin leverage at a ratio of 30: 1, as well as requiring brokers and operators to offer protection against negative balances.
Aside from regulatory oversight, the growth of CFD trading in these countries is attributed to the introduction of the Meta 4 trading platform. Also known as MT4, the platform provides users with advanced technical analysis and in-depth insights into various flexible trading systems. Through MT4, users can automate their CFD trading on various financial markets like ETF, Forex, crypto currencies and other valuable assets like gold and other precious metals.
Moreover, most European CFD brokers furnish their customers with a social trading platform that allows copy trading, a method of simply copying the positions of seasoned and successful CFD traders as they occur in the Meta 4 platform. On the other hand, expert CFD traders allow users to view their MT4 trading in exchange for a fee.
UK Trade Analysts Warn that Not All CFD Brokers are Licensed in the UK
Like in the U.S. there are also independent analysts and observers in the UK who scrutinize how investment brokers and platform providers carry on with their financial services, Since our topic is about CFD, a team of analysts known as Ask Traders performed a review of Cyprus-based Tradeo, which mainly specializes in CFDs for foreign currencies.
The team of AskTrader analysts’ review for tradeo MT4 and its social trading platform is that UK users are not protected against broker defaults. Primarily because Tradeo is not registered with the Financial Conduct Authority and therefore not covered by the Financial Services Compensation Scheme. That being the case, UK CFD traders, particularly the young generation of newbie derivative traders who use the Tradeo CFD trading platform, are advised to proceed with caution.