Contracts For Difference (CFDs) are specialised and popular Over The Counter (OTC) financial derivative products which enable you to trade on the price movement of financial assets Indices Futures, Commodity trading , Futures, Shares and Exchange Traded Funds in the stock market.
CFD’s enable clients to trade freely without actually owning the underlying asset or acquiring any rights or obligations in relation to the underlying asset. The main benefit of trading global CFDs is the flexibility to trade against the price movements without actually buying or selling the physical instrument.
Your Brokers CFDs derive their price from the underlying asset. You can trade CFDs if you believe the price of a financial instrument is likely to go up in value (strengthen) and if you think it is likely to go down (weaken). Your profit or loss in online CFD trading is determined by the difference between the price you buy at and the price at which you sell.
CFD Trading Methods
There are various trading strategies that are often used when trading CFDs, that even the most unskilled traders can understand. These decisions involve a number of trading methods and the most popular are the Long vs. Short
A long position in trading CFDs is when a trader purchases the asset. This will mean that the asset will rise or see an increase in its value over the time of life of the contract.
In long term trading, as it has a higher level of forecasting ability will allow traders to act on lower price market moves. Trades normally last from month to more than a year.
The short position occurs when the trader feels there will be a decline in the assets value and a ‘sell’ is selected, however there is an intention from the trader to buy the contract back at a later stage.
E.g.: A short seller’s expectation is that the price of the asset will fall over the life of the contract. If his prediction is wrong and the price of the asset starts to rise the open trade will sustain a loss, which is calculated by the difference between the opening and closing price of that asset over that time. The reverse is true should his open trade indicate that the asset chosen would decrease in value.
Short term trades can allow profits from short time spans even up to minute-to-minute moves. Limiting financial costs is an advantage in short term trading.
This would be a happy medium that offers both undated futures and contracts and can be traded on short or long term CFD strategies.
What are the Advantages of CFDs?
No Exchange fees –You do not own the underlying asset and do not acquire any rights or obligations in relation to the underlying asset. It is a contract between the client and your broker.
Leverage Trading –You need significantly less capital to open a trade in comparison to owning the underlying asset. Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains.
No Stamp Duty –For many, CFDs are not subject to stamp duty (this is subject to your individual circumstances and jurisdiction and can change).
Multi-vehicle Investment –The ability to trade a range of instruments from the same trading platform software
Trade on both rising and falling markets –Open either short or long positions according to the market conditions and your trading strategy.
CFDs don’t expire –The general idea is that where there is a rise generally is followed by a fall it is a continuous market cycle.
Hedging potential –A buffer for your trades if the trade is not going in the intended direction you can open the equivalent position in the opposite direction.