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Contracts for Differences Explained

As the name suggests, Contracts for difference (CFD) is an agreement entered upon by two parties, whereby they decide to exchange the difference between the opening price and the closing price of a stock. CFDs mirror the performance of a share or an index. Contracts for difference (CFDs) can be traded on equities (shares), index trades and commodities. CFDs allow investors to take long or short positions, and unlike futures contracts have no fixed expiry date, standardised contract or contract size. CFDs are traded on margin, and the profit/loss is determined by the difference between the buy and the sell price. CFDs are instruments that offer exposure to the markets at a small percentage of the cost of owning the actual share. CFDs provide an excellent vehicle for short term trading strategies and are the preferred vehicle amongst hedge funds and professional traders.

WHY CFD’s

CFD trading is growing in popularity increasingly quickly, asretail investors recognise their benefits. CFDs use the power of leverage to trade which is one of the key reason they are such a powerful tool. CFDs give the owner the benefits of share ownership without physical ownership of the underlying security. Contracts for Difference are strictly for the active trader, someone who is skilled enough to use the flexibility and agility these holdings offer. CFD’s are traded in a similar way to ordinary shares. CFD brokers are now mostly online and use electronic platforms, which makes the trading routine a lot faster. CFDs can also be used for hedging and so can also reduce overall portfolio risk. CFDs can be used for short selling, Margin Lending does not allow this. CFDs tend to carry a lower interest rate component than Margin Lending. CFDs are short term trading instruments while Margin Lending is more for medium to long term investment strategies.

CFD BROKER

CFD brokers are now mostly online and use electronic platforms, which makes the trading routine a lot faster. If you already know about CFD, you might be interested in finding CFD Brokers near you. Some brokers, use real prices with no hidden charges added to the bid/offer spread, and fees are levied separately. Others claim to offer commission-free trades, but the cost is usually factored into the spread.

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