Contract For Difference popularly known as CFDs is trading a derivative which allows a trader to take a position on a given asset/market on whether its price will go up or down. As a trader you do not have to own the underlying asset to participate but you trade the price movement of the asset which results in the difference between your buying price and selling price of a CFD trade. This difference in price between the buying price and selling price of a CFD on any given asset determines your PROFIT or LOSS on that trade.
You can go Long (Buy) or go Short (Sell) any given market depending on your analysis of the market or your trading strategy. There are thousands of markets which traders can participate in through CFD trading.
CFD trading is a leveraged product which means when you take a position in the market you only pay a small percentage of the full value of the position taken.
This small percentage is called margin and varies across different markets depending on the factors such as trading volume and the volatility of the underlying asset. There are no commissions to be paid in CFD trading as this is already factored in the Buy and Sell prices of the asset being traded. The difference between the Buy and Sell price of an asset or any market provides the broker with their commission and is known as the Spread.
CFD trading can be useful for traders looking to enjoy the tax free benefit as well traders and investors looking to diversify as well as manage risk within their investment portfolios.
Below is an example of a CFD Trade which is done at Value of Contract per point of price movement:
The market price for the EUR/USD Forex pair is as follows
Sell: 1, 11811 Buy: 1, 11817
If you feel that the EUR/USD is going to go up and you want to Buy 1 Contract at £10 per point:
The market goes up by 200 points to: Sell: 1.13911 Buy 1, 13917
It is important to note that trading can result in losses as well and it is important to manage your risk in the event that the market moves against your position.
In this example if the market had fallen by 200 points, the trade would have resulted in a loss. The Sell price would have resulting in a Loss of £2 , 080.
CFDs can be traded in a range of markets including Forex, Shares, Indices, Commodities and treasuries. In the UK CFD can be tax effient in that there is no stamp duty to be paid. In other countries, it is necessary to check with the relevant authority or investment advisor to see if CFDs are tax efficient and suitable for you.
Disclaimer – Futures, CFD, Margined Foreign Exchange trading, Warrants, Options and Spread Betting all carry a high level of risk to your capital. Only speculate with money you can afford to lose. Futures, CFD, Margined Foreign Exchange trading and Spread Betting may not be suitable for all customers, therefore ensure you fully understand the risks involved and seek independent financial advice if necessary.
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