WHAT IS A CFD?

WHAT IS A CFD?

CFD means “Contract for Difference”. Originally used by large institutions in UK to cost effectively cover their equity exposures, CFDs are now a mutual and communal trading tool used by the retail investors around the world.As the name suggests, a CFD is simply the setting of a contract for the difference between the purchase price and sale price of a financial instrument.A CFD reflects the performance of an instrument such as Commodities and Indices etc, offering the benefit of trading these without having to physically own the underlying instrument itself.CFDs offer active traders a number of benefits over and above that of other trading instruments. This website seeks to explain these benefits.

A Flexible Tool :

One of the major benefits of using CFDs is that you can place both long and short positions with equal ease. If you buy (go long) a CFD, you can potentially profit if there is a rise in the underlying reference asset price and lose if underlying reference asset price falls. Conversely, if you initially sell (go short) a CFD, you will profit from a fall in the underlying reference asset price, and lose if the underlying reference asset price rises.

A Clear Advantage :

The transparent pricing structure of CFDs means that unlike other derivatives the price is always based on the underlying instrument. Our principal’s CFD prices are derived from the underlying market. This means CFDs give you access to the underlying market liquidity, plus additional liquidity offered by our principal.

An efficient use of your capital :

CFDs are traded on margin. This is a far more cost efficient use of capital because you only have to allocate a small portion of the value of your position to secure a trade, whilst still maintaining the same market exposure as you would have if you had paid the full consideration. This mean your potential return on investment is magnified but remember trading on a margin will also magnify losses, if your position goes against you.

Margin :

You do not pay a full underlying value of a CFD trade. However before your trade you are required to deposit known as “initial margin”. Initial margin rates vary between instruments. These are calculated as a percentage of the overall value of the trade, typically between 1% to 5%. If all your trade is eligible for a 5 % margin, you can hold positions worth a total USD 100,000 having deposited only USD 5,000. You would therefore gain twenty times leverage on the collateral provided.Caution: It is important to remember that margin trading increases your exposure to risk and reward, therefore, losses and profits can be significantly higher.