CFD trading is a contract between the buyer and the seller. It is the short form of ContractFor Difference. In the contract, the buyer may agree to pay the seller or the seller may agree to pay the buyer. The contract time value and asset value difference is very important as it determines who will pay for the difference.
What Is CFD Trading All About?
This form of trading is used in the stock market. It takes advantage of the change in pricing. CFD trading makes speculation affordable and easy. Most traders are now choosing CFD since it has several advantages over the other financial derivatives. You do not need to put your entire stock value to make any purchase.
The trade only needs you to pay marginal amounts starting from one to 20 percent of the actual cost. When the stock is sold, the seller will receive the profit amount. This means that you can easily buy more stocks with lesser amounts. Since there is no physical transfer of shares, there is no need for you to pay stamp duty when you purchase the shares through CFD.
Since there is a stop loss option available for CFDs, you can make sure your shares are sold when you sense they have reached a level where trading could become unprofitable. This will protect you from making huge losses.
Long And Short Positions
CFD also gives you a chance to go long and short. This form of trading offers a flexibility that cannot be found in other trading options. CFD also has no expiry date, therefore you can close your position at any time you feel like. This form of trading may be available for all forms of stocks including Forex.
If you invest in the normal share trading, you have to wait for some time for an execution. However, this is not usually the case with CFD trading as you only have your trade placed within a few seconds as there are no executions.
CFD trading gives you the chance to earn profits within a short time. You can invest a small amount but make 10 times more. In most cases the CFD brokers will give you 10 to one or 20 to one leverage. However, you cannot make such huge profits unless you have in-depth knowledge about this form of trading and a good CFD trading system.
Before you start trading, make sure you also consider the risks involved in this form of trade. Many traders face a risk of overtrading. This is because they are tempted to purchase more since the CFDs only need them to pay a percentage of the costs.
Overtrading could cause huge losses and this is one of the main reasons why you need to be very cautious when trading. You will not be able to enjoy the rights enjoyed by normal shareholders since no shares exchange hands.
The financial leverage received could also turn out to be a disadvantage at times. Since you are making your profits from the difference in the prices, you can incur huge losses in case the price falls.