CFD Trading Explained

CFDs are contracts which give an opportunity to traders to benefit from buying and selling assets, without physically owning them. CFDs provide investors with high leverage by low margin level. As every trading instrument CFD also carries some dose of risk. However it has a lot of advantages which can be used in investing strategy to make a profit.

CFD Trading: Introduction

CFD (Contract for difference) is a financial derivative used by investors to take advantage of fluctuations on the financial markets. The value of the CFD comes from a mixture of bonds, stocks, commodities and other financial instruments.

CFDs are contracts between buyer and seller, which state that at the end of a defined period, the seller will pay to the buyer the difference between the opening and closing price of the contract. If the difference is negative, that is if the value has gone down, then the buyer pays the seller.

CFD trading helps to have flexible, cost effective and geared exposure to global markets. If a trader buys a CFD then s/he doesn't actually physically buy the underlying shares. The CFD does not expire, any positions that are left open overnight will be “rolled over”. This means that any loss and profit is realized and debited or credited to the traders account and fees are calculated. The position then carries forward to the next day.

The CFD provider may make a number of charges as part of trading or opening a position. These may include, bid-offer spread, commission, overnight financing and account management fees.

CFD Trading: Margin and Leverage 

CFDs provide the trader with leverage. Leverage involves taking a small deposit and using it as a lever to borrow and deal with a larger quantity of assets. With CFDs, only a small amount of money is required to take large positions.

CFDs are traded on margin, and the trader must maintain the minimum margin level at all times. CFDs allow a trader to go short or long on any position using margin. A feature of CFD trading is that profit, loss and margin requirements are calculated in real time. If the amount of money deposited by investor goes down below minimum margin level, margin calls can be made. Traders need to cover these margins quickly otherwise the CFD provider may liquidate their positions.

CFD Trading: Risks

While CFD trading offers many benefits, it is important to note that it carries a high level of risk to capital, so trader should only trade with money s/he can afford to lose. In the event of a market gapping, one may not be filled at the level s/he requested which means one may lose more than his/her initial deposit.

There are also counterparty risk and liquidity risk connected with CFD trading. Counterparty risk associates with inability of the counterparty to pay. Liquidity risk is a possibility that when the investor tries to close the contract, they will not be able to, at the desired price.

CFD Trading: Advantages

CFD trading become very popular and continues to develop as it has a lot of advantages comparing with traditional stock market. CFD market benefits for traders are the following:

  • CFD markets offer a diversity of assets for traders. All the indices, commodities, major stocks, bonds and currencies are available, so traders have a choice to diversify a CFD portfolio, and use CFDs to diversify their portfolio.
  • Leverage is a great tool for traders who use it correctly.
  • Interests paid on trader’s free equity balance.
  • CFD trading can also provide tax benefits as the costs of investing are mostly deductible.
  • CFD trading allows investors to go long or short with equal ease and traders gain profit from share price decrease as well as in case of price increase.
  • Online account reporting and daily statements make it easier to control a portfolio.
  • CFDs allow you to benefit from all the economic benefits of share dealing, without physically owning the shares.
  • Investors have an ability to trade on the market place using margin and get the chance to increase profits.
  • CFD trading is associated with low transaction costs.

Therefore, low margins, flexible trading and sophisticated tools allow investors to easily trade or react to price movement and market news while using CFDs. Additionally, now traders have an opportunity to multiply their strategies, create and add new instruments to their CFD portfolio by using new GeWorko Method.