What is CFD trading meaning
CFD trading meaning in finance, a contract for difference (CFD) is a contract between two parties, typically described as “buyer” and “seller”, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (if the difference is negative, then the buyer pays instead to the seller). In effect CFDs are financial derivatives that allow traders to take advantage of prices moving up (long positions) or prices moving down (short positions) on underlying financial instruments and are often used to speculate on those markets.
For example, when applied to equities, such a contract is an equity derivative that allows traders to speculate on share price movements, without the need for ownership of the underlying shares.
CFDs Trading are available in Australia, Austria, Canada, Cyprus, Czech Republic, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, The Netherlands, Luxembourg, Norway, Poland, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and New Zealand. They are not permitted in a number of other countries – most notably the United States, where due to rules about over the counter products, CFDs cannot be traded by retail investors unless on a registered exchange and there are no exchanges in the US that offer CFDs.
CFD Trading Brokers
In the late 1990s CFD trading were introduced to retail traders. They were popularised by a number of UK companies, characterized by innovative online CFD trading platforms that made it easy to see live prices and trade in real time.
It was around 2000 that retail CFD traders realized that the real benefit of trading CFDs was not the exemption from tax but the ability to leverage any underlying instrument. This was the start of the growth phase in the use of CFDs. The CFD providers quickly expanded their offering from London Stock Exchange (LSE) shares to include indices, many global stocks, commodities, bonds, and currencies. Trading index CFDs, such as the ones based on the major global indexes e.g. Dow Jones, NASDAQ, S&P 500, FTSE, DAX, and CAC, quickly became the most popular type of CFD that were traded.
CFD Trading Risks
The main risk is market risk as the contract is designed to pay the difference between the opening price and the closing price of the underlying asset. CFDs are traded on margin, and the leveraging effect of this increases the risk significantly. Margin rates are typically small and therefore a small amount of money can be used to hold a large position. It is this very risk that drives the use of CFDs, either to speculate on movements in financial markets or to hedge existing positions in other products, One of the ways to mitigate this risk is the use of stop loss orders. Users typically deposit an amount of money with the CFD trading provider to cover the margin and can lose much more than this deposit if the market moves against them.
If prices move against open CFD position additional variation margin is required to maintain the margin level. The CFD provider may call upon the party to deposit additional sums to cover this, and in fast moving markets this may be at short notice. If funds are not provided in time, the CFD provider may close/liquidate the positions at a loss for which the other party is liable.
Another dimension of CFD trading risk is counterparty risk, a factor in most over-the-counter (OTC) traded derivatives. Counterparty risk is associated with the financial stability or solvency of the counterparty to a contract. In the context of CFD contracts, if the counterparty to a contract fails to meet their financial obligations, the CFD trading may have little or no value regardless of the underlying instrument. This means that a CFD trader could potentially incur severe losses, even if the underlying instrument moves in the desired direction. OTC CFD providers are required to segregate client funds protecting client balances in event of company default, but cases such as that of MF Global remind us that guarantees can be broken. Exchange-traded contracts traded through a clearing house are generally believed to have less counterparty risk. Ultimately, the degree of counterparty risk is defined by the credit risk of the counterparty, including the clearing house if applicable.
How to start Online CFD Trading for dummies
To start online CFD trading you need to open demo CFD account with CFD trading brokers and download online CFD trading platforms, Then you can start online CFD trading on your mobile or desktop computer, To get daily CFDs News you can use “ForexSQ.com” CFD trading brokers news website, We use Wikipedia as source.