CFDs or contract for difference is a real boon in the world of stocks and shares. CFD is basically a contract between the buyer and the seller. Here the buyer agrees to pay the seller, and vice versa, the difference between the current asset value and its contract time value. The increase or decrease in the asset value determines who will pay the difference. It is used as a financial instrument to trade in the stock market by taking advantage of the changes in prices. CFD trading makes speculations easy and more affordable.
Why CFD
CFD trading is something that is really catching on these days. The reason for this is quite simple. It has several advantages over other financial derivatives. The biggest advantage is that there is no need to put up the entire value of the stock to make purchase through CFD. Only marginal amounts (from one to 20 percent of actual cost) need to be paid. Once the stock is sold, the profit amount is received by the seller. This means more stocks can be purchased for lesser amounts. There is no need to pay stamp duty when the shares are purchased through CFD. This is because there is no physical transfer of shares. CFD trading also does not require any minimum deposit or deal size.
There is stop-loss option available with CFDs. This allows a person to make sure his or her shares are sold before or when they reach a particular price after which trading could turn out to be unprofitable. This ensures there is no loss from the trade. Another advantage of CFD is that it allows the traders to go both long and short. This flexibility is not available with other instruments of finance. Also, there is no expiration date for CFD. These are some of the advantages that CFD holds when compared to other financial instruments. CFD trading is available for all sorts of stocks including Forex.
Where To Start CFD Trading
CFD trading can be done either with authorized single agents or CFD providers. CFD providers mainly refer to brokers and market makers. There are also many online companies that provide CFD trading services. They all require the client to pay a small margin of the cost of the actual stock being bought. This may vary from agent to agent. The agents charge a small fee for the trading services done.
What Are The Risks
Before starting CFD trading, it is necessary to consider the risks involved. One of the main risks is overtrading. Since CFD requires the trader to pay only a percentage of the costs, there is always temptation to purchase more and more. Overtrading could always lead to great losses. Therefore, it is very essential to be cautious and tread carefully. As no shares exchange hands, CFD holders never get to enjoy the rights enjoyed by normal shareholders. Another major disadvantage is that the financial leverage received under CFD could turn out to be a disadvantage as well. This is because just like benefitting from the difference in prices, there are also major losses incurred when prices fall.
CFD trading does ease the way a person can speculate in the market. Due to its low cost and high leverage, it is becoming popular with many traders despite the risks.