Wow, it been a long time since my last blog post. This is
because I was busy with exams. So this week I am talking about CFD’s. Let me first define what a CFD is. A CFD (Contract For Difference) is a deal
which happens between two parties where one party is the buyer and the other is
the seller where the settlement is a difference in monetary terms on the
underlying instruments (which is used as a reference). So the buyer doesn’t actually purchase the financial instrument. The buyer then takes advantage of the market as when the price
differential in the underlying instrumental difference increases. So the buyer
is making a profit. A CFD is a
derivative, consider a financial instrument then the derivative is the market
price of that financial instrument derived from underlying assets.
When I first read up about CFD’s I said to myself this is
just like a futures contract. It turned out they are like futures but there are
some major differences. I have listed the biggest key differences between the
two below:
- CFD’s generally have smaller contract sizes although they can be bigger if you want them to be
- They don’t have a contract expiry date
When you close your trade you pay
commission charge which is typically 0.1%.
Just like trading any other securities you can go long or go
short, however you can trade any product you wish, from indices, commodities, Forex
and energies. When going long, the LIBOR rate is added to your broker margin
percent. However when going short if the LIBOR > (greater than) broker
margin percent then you are credited, but if the LIBOR < (less than) broker margin
percent than you are debited.
If you placed a trade to buy shares in a company in the FTSE
100 then any profits or losses these will be put on a rolling contract. A
rolling contract for a CFD basically means that any profits/losses will be
credited/debited to your account and the profits/losses are realised.
So what are the benefits of CFD’s
- They are versatile and the market is 24 hours a day, so you can buy it when the FTSE closes or the DAX closes
- You don’t need a lot of money to start trading CFD’s
- If you buy long on equities before the ex-dividend date then your account is credited with the dividend payout for each share after the market closes. Do bear in mind that Financial charge may outweigh this.
- You don’t need to physically own the instrument to trade, this also means that you do not need to pay stamp duty and capital gains tax, HURRAY!!
- Just like trading any other financial instrument
CFD’s in a sense is basically like spread betting you are in
a sense placing a trade on the outcome of the market, and you also incur a
financial charge for every night the trade is live for. In addition the valoume of trading CFD's has significantly grown over the years.
How do you trade CFD's
You trade CFD’s not over the phone but via electronic
trading, this is done over the internet. You can do it from home using the
software given to you by a broker or now you can do it online with no software
but some sites require you to install Java. In addition, electronic trading
ensures that the trade is executed in less than a nanosecond, so you don’t miss
out in the action. Over the phone whilst talking to your broker, prices would
fluctuate whilst you talked, hence electronic trading has helped smooth out this so
called “insider information.” Electronic trading has developed a lot over the
years from algorithmic trading to high frequency trading.
I hope you found this post informative and I hope this at least provides a foundation for trading CFD's. The blue words in the text, when clicked provide more information on the word. This post is intended to educate the reader.
Please note this is my opinion and
he/she (the reader of this post) should not place a trade with
the information provided in this post as this may result in a loss
for the individual. I will not be held responsible for the loss you make. The
data presented may be inaccurate/incomplete and will be inaccurate due to the
nature of financial markets
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ReplyDeleteGood one... This blog nicely explain CFD definition, benefits and how to trade CFD. Thanks for sharing.
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