Cfd Trading enables you to hold a position in the market without verily owning the asset. Cfd stands for covenant for Difference. It is a financial derivative that allows you to take positions depending on your expectations of market movements. You go long (or buy Cfds) if you believe the markets are going to go up and you go short (or sell Cfds) if you believe markets are headed south.
Cfds can be traded in equities, indices, currencies and commodities. The parties that trade in Cfds contain day traders and hedge funds.
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Why Cfds?
The main pull of trading in Cfds is that they offer you a very tantalizing leverage. The ratio can be 10:1 or 20:1 even. So, with a very small first capital you can take large positions. If you have a strong trust that markets will rise but don't have the wherewithal to put your money where your heart is, Cfds are an ideal tool.
Things To Know About Cfds:
* Like shares, Cfds have no expiry date.
* You have to claim an first and dissimilarity margin before you start trading.
* They allow you to trade on a wide variety of assets and entrance dissimilar markets. So it is important to be well-versed in world markets and regional tax laws. You can entrance markets in Singapore, Australia, New Zealand and a host of European nations as well with Cfds.
* The same rule that applies to all asset classes, applies here too. Advantage from knowledge of the dissimilar factors that play on the prices of Cfds like political, economic, collective and legal changes.
* Cfd trading is especially useful when you want to make some quick profits over a short duration of time.
* As a buyer of Cfds, you are entitled to receive dividends on the basic equity but as a seller you are liable to pay them to the buyer.
* There is no stamp duty on Cfd trading but you will be charged commission on your covenant size as well as finance charges based on the existing London Inter bank Offer Rate (Libor) depending on the type and duration of trade.
Differences between Futures And Options And Cfds:
Futures and options are standardized exchange-traded products with much larger covenant sizes. Cfds are over-the-counter transfer products that come in smaller sizes and hence can be traded by small-time traders.
Risks Involved:
* The added leverage gained, comes with the downside that you could lose a lot more than just what you invested. So it is advisable to adequately diversify yourself by splitting your investment across assorted asset classes.
* The value of a Cfd covenant is as good as the parties that have entered the contract. So, you are exposed to the possibility of counterparty risk.
* If markets move against your expectations the dissimilarity margin will have to keep being replenished so stop loss and limit orders come in very handy to restrict the estimate of your losses.