What Are CFDS?
CFDS stand for contracts for difference. When you take up a CFD transaction you have a contract to exchange the difference in value of a financial instrument, for example a Stock in a company, which occurs between the opening and closing position. When you enter into a CFD you don’t take delivery of the Stock and are not entitled to dividends.
When you open a CFD, the provider will take a commission. Depending on which provider this is will determine how much this costs and how the charge is taken. Typical charges for US Stocks maybe 2 cents per share per side(opening and closing) with minimum charges at $13 for an online order and $22 for a telephone order.
Some CFD providers now offer dealing in CFDS in a huge variety of financial instruments from all over the world. These include US Stocks, European Stocks, Asian Stocks, Indicies,Forex, Commodities, Options.
The best ones offer state of the art trading platforms that provide live data feeds for many financial instruments. Here you can manage all your trading with instant deal tickets, charting functions to perform your technical analysis and news feeds for fundamental analysis.
Why Trade CFDS?
You might ask yourself, why trade CFDS?
- Only small deposits are required for large positions in the market. For example if you opened a Stock CFD with $5000 you would be have the equivalent interest in $100,000 of that stock.
- You can go Long or Short on financial instruments. Therefore it is possible to profit from both falling and rising markets.
- Typically many private investors purchase Stocks in the view that they are rising in value. The problem is with this strategy is that in bear markets it becomes tricky to pick a winner. Why not learn to short markets? That way you can always take advantage of opportunities which ever way the market is trending.
- CFD accounts offer lightning liquidity. Positions can be opened and closed at the touch of a button and the money is returned to your account in seconds. This enables you to act fast when you spot an opportunity and need to be cashed up.
- Freedom to take control of your trading instead of waiting for the thumbs up from brokers
- Quickly and easily hedge against real stock positions in a down turn by opening a short position against that Stock.
Compare a Typical Stock Purchase To a CFD Trade
Consider buying Stock A
1/ We buy $100,000 worth and the share price moves upwards by 2%. Therefore we make $2,000
2/ We buy a CFD of Stock A with a deposit of $5,000. The price rises by 2%. We still make the same amount $2,000.
The normal Stock position has made 2% cash on cash return
The CFD trade position has made 40% cash on cash return.
So without having access to $100,000 dollars to buy the shares it is possible to make the same amount of money.
Conversely if the stock falls 2% then in the case of the Stock position your value of shares will be $98,000
In the CFD the contract it would now be worth $3,000
Check out the Trading Video section. There is going to be lots of footage for you to learn about trading
Happy Trading
Richard Hurford
Cfd Trader
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