Trading Futures with CFDs
Posted on December 11, 2009
Filed Under Share Trading | Leave a Comment
Many people today are choosing to invest online in the stock exchanges around the world. One term that keeps coming up is that of the Contract for Difference or CFD. The reason why many people have not heard of it is because in the US it is against the law and considered to be a form of short-selling. However, in many indices around the globe, the Contract for Difference is a perfectly legitimate means of making money in the stock market.
In a CFD, or Contract for Difference, a buyer and seller of a share of stock agree that the seller will pay the buyer the difference between the current market value of the share of stock and what it is expected to be at, at a later time. Should the stock never actually reach the assessed value, the buyer will still be responsible for paying any losses.
This type of trading allows one to speculate on the potential of a share of stock and benefit financially from it. There is not even a need for the ownership of the stock because in using a CFD, you do not really purchase the shares, but rather make profits through speculation only.
One can choose to go for the short position or the long position in using CFD’s. They can also be done on an index level similar to that of a future, only that the Contract for Difference does not have any expiration date. It will remain open until the buyer closes the contract. Once the contract has been closed, the deal is done unless there is a loss in value for which the buyer has to pay.
In most cases, you can even trade Contracts for Difference on margins which can range anywhere from 1% all the way up to 30%. These margins make CFD’s highly lucrative if they are a profitable trade. But if they are a loss, the margins will definitely cost the investor.
Depending on the index, a CFD is either listed or it is not. For example, in Australia, some CFD’s are actually listed on the main Index; where as other places do not actually list them even if they are available.
There is a significant amount of risk involved with trading CFD’s. Should the share not go as one speculates them too, then the losses can be great. These losses can be even further multiplied when one chooses to trade using margins. Most of all though, Contracts for Difference are best used only when the market is in a stable position in order to minimize potential risks. In the end though, you have to keep in mind that you should never invest any more then you are absolutely willing to loose should a trade o belly up.
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