What are CFDs? Wholly Explained for beginners! -Know the Contract for Differences-

May 28, 2016

Read this and you will understand the CFDs.

What are CFDs? Wholly Explained for beginners! -Know the Contract for Differences-

Contracts for Difference are one of the world’s quickest growing trading instruments, offering a fast track route into a spectrum of global markets.

They offer the same potential gains as trading assets traditionally – but at a fraction of the initial cost

A Contract for Difference (or CFD, or ‘swap’) is simply an agreement to exchange the difference in value of a share or index between the times a contract is opened and then closed.

CFDs now account for more than 25 per cent of all transactions in the London Stock Exchange.

Their popularity is driven by some very attractive features.

CFD is traded on Margin

Not least, the leverage they provide.

CFDs are first cousins to spread betting in that you only have to put up a fraction (or margin) of the total trade value.

You don’t own the actual financial security but trade on the movement of the price, whether that be rising (and buying or ‘going long’) or falling (and selling or ‘going short’).

There is no fixed expiry date or contract size, they can be closed at any time and are free of stamp duty.

CFD is Global now

The normal CFD software enables providers to offer their clients a gateway to thousands of markets:

it is as easy to trade in commodities, currencies or interest rates, as it is in a single company share – whether as new trading opportunities or to hedge a portfolio of existing investments.

CFD’s also allow speculation on whole indices or individual sectors, such as banks or the media. They are endlessly flexible.

How CFD works?

Because they are traded on leverage, CFDs offer the chance of a much greater return on an initial investment than if paying for the trade in full in the traditional manner.

Losses are amplified in the same way.

For instance:

If you bought £10,000 of shares and their value changed by £500 you would make a profit (or loss) of five per cent.
If you opened a CFD on those shares with a margin of 10 per cent, it would cost you £1000.
The price would still change by £500, giving you a profit (or loss) of 50 per cent.

Thus, you must know the “Risk Management”

A CFD trading platform includes tools to limit losses and manage those risks, and provides access to the latest market news, economic data and company announcements, enabling investors to respond instantly.

Where the CFD Market Prices come from?

Brokers can provide access to feeds from stock exchanges around the world, presenting prices of indices and individual stock in real time to power your trading and portfolio management applications.

The data can be bought direct from the exchanges or, more usually, from a data provider such as Reuters or Comstock.

The brokers can obtain them all.

Many online brokers have already created modules for data purchase which can be installed into the system as part of the whole package.

CFDs with “Direct Market Access”

Trading systems provide the facility to go direct to an exchange to put an order, giving greater control over the way a trade is executed.

Direct Market Access (or DMA) offers lower transaction costs.

They are not handled by brokers so carry less chance of errors and they can be very fast – allowing traders to respond quickly to market opportunities.

However, you do gain much greater liquidity by placing an order with a market maker for a derivative product.

The list of All CFD Brokers

50 USD for Free

3500 USD for Free

123 USD for Free

up to $1000 for Free

30 USD for Free

25 USD for Free

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