CFDs

Written by Trader Maker

A (CFD) Contract for Difference is an agreement between you and your broker/trading firm. It is a financial instrument that allows you to predict a RISE or FALL in the price of a share without having to physically own the share. You are speculating on the price going up or down at a particular point in time. This means you can make more profit at a much lower risk and therefore cost.

With CFD trading you do not have to pay for the full value of the position you have chosen. Instead you put up a deposit, or margin. This is typically around 5% when using a trading account this means you can trade up to 20 times your initial capital. When you close your position, the difference between your opening contract value and your closing contract value is realised. So just as with buying shares or trading futures, the degree to which you are correct in your CFD trading affects how much you make or lose.

 

One key benefit of trading CFDs is that you do not incur any stamp duty, as you are not making a physical purchase. Another key benefit is that you can sell or ‘short’ a stock. This means if you hear any bad news that may affect a stock price you act to make a quick profit. Short selling was nearly banned during the early part of the credit crunch but never happened. This is a valuable tool when making short term financial gains from trading.

CFDS are a relatively new product on the market. Here is a snap shot of how CFD trading stacks up against other financial products:

  • Pay no Stamp Duty
  • Pay Dividend and Interest
  • Access to Global Markets
  • Ability to Buy (Long) and Sell (Short) markets
  • Instant execution
  • Leveraged Trades
  • Physical Ownership of the Financial Instrument

CFDs

  • yes
  • yes
  • yes
  • yes
  • yes
  • yes
  • no

Other

  • no
  • yes
  • yes
  • no
  • yes
  • no
  • yes


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