CFDs
or Contracts for Difference are financial instruments that has gained
huge popularity in Asia over the past few years. It was formed in
early 80's and named as 'equity swap'. Contracts for Difference are
an agreement between the seller and the buyer that the seller will
have to pay the difference between the value of the asset at the time
of entering into the contract and at the end of the contract to the
buyer. Or receive the amount from buyer if the difference is
negative.
A
CFD does not have volatility premium or time value. It is just one
for one equity swap. Like equity swap, CFDs are OTC, meaning the
contracts can be customized as per the needs of the individual and
exchange fee can also be avoided. However,
selling may be difficult if one cannot find a seller for a CFD.
One
of the features of contracts for difference is that it can be traded
on margin and requires very little fund to get started. Another
advantage is its ability to reap the benefits of downward trends
pretending a short position. The traders like the prospects of CFD
business. They get commission from trades.
Contracts
for Difference are popular among the traders to an extent that the
Australian Stock Exchange has listed exchange traded CFD's. Moreover
they are also diversifying their products and earn exchange fee for
each trade also. Since CFD's are marginable, there are two types of
margin with all margin trading – initial and variable margin.
Variable margin is mostly set at a particular range with stocks
however a fixed percentage is not necessary with marking-to-market
and Contracts for Difference.
There
are several factors to be considered when you start trading Contracts
For Difference
make sure that you have clear knowledge of the risks and know how to
minimize them by implementing proper stop loss orders. It is also
advisable that before starting trading for real money, you can try
some of the on line trading simulators. These are absolutely free of
cost and give you a fixed amount of play money to be used. It helps
you to understand how to make use of historical data, current market
trends and how to use proper stop loss orders, etc.
About
Trading Lounge
Tradinglounge is an online trading, analysis and education service that
offers services such as Day Trading, Trading Strategies, Technical
Analysis, and How to Trade advice by a reputable and experienced
trading coach. www.tradinglounge.com.au/
was started by Peter Mathers in 1982 to meet the growing demand of
accessible and sensible education in online trading.
