A contract made for the difference between “a trade entered and when it is exited” is called contract for difference and known as CFD. A CFD is a contract for the broker and the client. Over the past decade, trading CFDs have gained attention of people as it has so many benefits that a client can reap. CFDs have also increased trading instruments’ popularity in recent years. Know about CFDs in detail by referring to relevant books or from the web links like http://www.independentinvestor.com/brokers/cfds.
Some of the major advantages that CFDs provide are as below:
Go Global – Major Markets Are Now Accessible Easily: We can see most of the CFD brokers offering these products across world. They have their products in almost all of the major markets, thereby enabling the traders to trade in any market easily.
Benefit and Demerit of Higher Leverage: The beauty of CFDs is that they provide more leverage than what one gets via traditional trading. The starting leverage percentage in the CFD trading market starts at 2% and depending on the asset involved, it can go up to a massive 20%. If the investor has lower margin requirements, there is less capital outlay for whoever is investing thereby giving higher returns. The downside is that by increasing the leverage, the losses also get magnified.
Lax Shorting Rules: It so happens in certain financial markets that shorting is not allowed during certain intervals. The market may require that the trader should borrow the instrument before he/she can short. In the CFD market, there aren’t any rules for short selling instruments. The benefit is that an instrument can be made short whenever you want and as the ownership of the underlying asset does not exist, eventually there is not cost for shorting.
Absolutely No Fees despite Professional Execution: Brokers dealing with CFDs definitely offer similar order types provided by traditional-brokers. There are features like stops, contingent orders, limits, “if done” and “one cancels the other”. There are a few brokers, which also offer guaranteed stops. But, such brokers often charge a fee for providing the service which does make sense. The fees charged for CFDs are negligible. The fact is that many brokers do not charge a penny for entry/exit of a trade. The broker gets compensated by having the trader pay for the spread. In order to buy, the trader should pay the price asked for and to short/sell, he/she must pay the market bid price. Now, volatility comes into play as the spread depends on the volatility, which would determine if the spread is big or small.
Thus, we can say that CFD is a contract that can enable you to facilitate trading and makes it easier. However, this industry of CFDs is not that regulated and we cannot rely on just any broker. Here in this industry the reputation and goodwill of a broker is very important. Also an investor should consider his or her experience for the subject matter in the industry and past records before entering into the contract (CFD). Therefore, it is very important to research well about the broker.