CFD TRADING

A CFD is a form of derivative trading that enables speculation on the rising and falling of general world prices of fast-growing financial markets and instruments such as commodities, treasuries and currencies. The CFD trading gives you the allowance to sell (Go Short) on your financial instrument and BUY (Go Long) if you think the price will move that way. With CFD, you don’t have to trade a physical asset, as you only purchase any quantity of a particular instrument when you have a speculation about the movement of the price. The CFD works in global markets and aggregates the price movements of all stocks listed on the stock exchange. For every movement in favor of the position you have taken, you multiply the profit with the number of shares you have bought or sold.

The CFD offers potential investors and traders an opportunity to gain from the price movement without having sole ownership of the underlying asset used to trade. A CFD contract is between the client and an intermediary in this case, called the broker. The CFD offers leverage which implies that you can deposit a meagre percentage of the total value of the trade in which you have chosen a position. This is also referred to as trading on a margin. The aim here is to maximize your returns based on the total/full value of your position and minimize your losses. When participating in a CFD trade, there are various costs involved.

 

These costs include:

Holding Costs: this cost is referred to the charge against the current position of the trader. It can be positive or negative which depends on the movement of your position and the holding rate/interest rate that is applicable.

Commission: this is only applicable to shares. Here, it is mandatory that you pay a separate fee for you to be able to trade CFDs. These commissions are based on the number of shares listed on the CFD platform and it usually begins from 0.10% of the total/full value of the position and there is a minimum commission fee of £9 which is always required to be paid to the CFD platform.

Spread: this is the difference of the sell price and the buy price. The lower the spread, the less likely the movement of the price tilts in your favor before you can make a gain. When entering a trade, you use the buy price and when exiting the trade, you use the sell price option. The CFDs continually offer competitive spreads.

Market Fees: this is the fee charged to have a view of the price information for the CFDs, of which you must have activated the market data subscription before the fee can be charged.

 

Advantages of CFDs

CFDs tend to assure a certain level of leverage compared to the traditional trading. The leverage available in the CFD trading market is subject to legal regulations as a lower margin results to less capital for the investor and trader leading to low profits. A good leverage system can be used to magnify losses.

Also, CFD brokers have access to global markets and they can move from one platform to another offering a wide range of products. In a CFD contract, there is no possibility of shorting or borrowing stock as the trader is only allowed to lend an instrument before selling or meeting the margin requirements. As the broker doesn’t own the underlying asset, he can be shorted at any given point in time during the trade.

One major feature of CFDs also include, offering many similar orders and be guaranteed of a fee charged against recouping the costs. Dealers make money when the trader pays these costs and do not charge any other fee of any kind asides this. The profit/loss can be small or large depending the level of risk attached to the underlying assets and the fixed set of spreads set over the course of the contract.

In a CFD contract, brokers are allowed to offer index, stock, currency, treasury and sector CFDs as an alternative to exchanges. The general stock market requires that there should be a minimum amount of capital available to be traded per day within some high net worth accounts. The CFD market isn’t bound by these restrictions and all account numbers can trade freely as they deem it fit.

Disadvantages of CFDs

In the CFD market, the lack of a stringent regulation is not a welcome idea as the trader’s credibility is judged on his reputation, financial position and longevity instead of a government standing or liquidity. There are successful CFD brokers, but it is necessary that the broker’s account is investigated before opening an account. Also, CFD trading is fast becoming increasingly used and this calls for closer maintenance and monitoring so that the risks and margins are able to hedge against the fall in value of a stock.

On another hand, the CFDs gives a better attractive market alternative to the traditional stock exchange and traditional markets. They also present possible pitfalls as having to continually pay for the spread on entries eliminates the possibility of a gain from little and small transactions.