One of the fairly new concepts of securities trading is Contracts for Difference. It is fairly “new” since it was said to begin in 1990. CFD trading is still catching acceptance and popularity in world economies. So far, only the United Kingdom, The Netherlands, Poland, Portugal, Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, New Zealand, Sweden, France, Ireland, Japan and Spain have accepted them. The Securities and Exchange Commission has restricted the trading of CFDs in the United States. If these CFD-accepting countries, that happen to be one of the strong players, should you go for CFD trading as well?
CFD features the following benefits:
•No Stamp Duty. You do not physically buy shares with CFD’s
•Low capital requirements. CFD’s are a ‘margined’ product
•Choose to either go long (buy) or short (sell)
•Huge range of markets. CFD’s are available for practically any market
•Cap potential losses. Stop Losses and Limit Orders are available with CFD
This form of securities trading has earned quite a following because of its features:
•Buyer does not physically buy shares so there is not Stamp Duty
•CFD require low capital since you only have to fund a margin of the price
•You can choose to buy (long) or sell (short)
•CFDs are available to any market
•Stop Losses and Limit orders are available allowing the buyer to cap potential losses
This does not really mean it is 100% safe. Since this deals with securities, there is really no fool-proof guarantee that your investment is safe. This is not a fixed-income investment where you can just sit back and wait until your investments gives you returns. With this kind of trade, you do not actually buy the stocks. You only pay a margin of the price so there is not much a capital outlay. You decide whether you buy or sell after you speculate if the price of a stock or security will rise or fall. When one is not careful, you may end up putting in more funds than you hoped for. As always, it is always wise to do your homework.
To start trading CFDs, you would need a broker. There are websites that feature the ins and outs of Contracts For Difference. Just to name a few services offered, they tell you how to trade CFDs, strategies and available brokers. Online CFD trading is still not as popular as online trading of stocks.
CFDs are typically traded over-the-counter with a broker or a CFD provider. They define the contract terms and conditions, the marginal funding rates and requirements, commissions and what instruments are up for grabs. A trade can be a market maker or a direct market access. The principal difference is the price of the instrument being traded because of their different approaches. Direct market access is said to be more expensive.
Yes, CFD trading is said to lack transparency because it is traded over-the-counter. CFDs have been criticized because it is relatively new and are marketed to inexperienced traders. Regardless of the criticisms, Contract For Difference is standing the test of time and the economies. The safety of online CFD trading remains to be seen.
