A contract for differences simply known as CFD is simply an arrangement made in a futures contract where a cash payment is required for settlement differences instead of the delivery of physical goods and securities.
In all, it is a simpler and easier way of getting across payments because gain and losses are both paid in cash. Through CFD, an investor will get all the risks and benefits of security ownership without actually owning it.
To further break it down. The CFD represents a tradable contract between a client and a broker, who are exchanging the difference in the current value of a share, currency, commodity or index and its value at the contract’s end.
Advantages of a Contract for Differences CFD
The thing about CFDs is that it provides better leverage when compared to traditional trading. Standard leverage in the CFD market is as low as a 2% margin requirement and as high as a 20% one. What the lower margin requirements indicates is that there is lesser capital outlay and the probability of higher return for the trader is increased. In addition, the CFD has an advantage of not having a limit of amount of capital or limiting the number of trades in a day. Investors will have the option of opening an account for as low as $1,000.It is important to note that CFD owner can participate in stock split plus the fact that the receive cash dividends. All these have the potential to increase the return of investors.
There are many products on offer in most of the major markets in the world and most of the CFD brokers offer these products. Fortunately, the broker’s platform can be used to access these markets. There are many financial vehicles and traders can benefit from them like index, stock, commodity, currency, treasury and sector CFDs.
Another issue to note is that there is no short selling rule in the CFD market since an instrument can be shortened even at any time. Also, there is no shorting and borrowing cost because the asset has no ownership. When trading CFDs, you may be charged little fees or no fees at all. When buying the trader will pay the asking price, and then takes the bid price when shorting or selling. Note that the spread could be small or large and typically fixed depending on the underlying assets volatility.
Looking at it from another angle, when traders pay spreads on entries and exits, it leads to them being unable to profit from small moves as it decreases the winning trade and increases the losses by just a small amount over the underlying asset. One thing you must understand about the CFD market is that it is unregulated and this means that the financial position does not really support your credibility instead the brokers reputation is what their credibility is based on. However, due to the fact that each day a trader holds long position costs money, it then means that a CFD is not suitable for buy-and-hold trading or long-term positions.
WB2016044 Publisted 05/01/17