CFDs (Contracts for Difference) are contracts between two parties to settle the opening and closing price difference, multiplied by the number of shares stipulated in the contract. CFDs trading is very similar to share trading, but with a few, distinct differences. These have allowed CFDs to transform themselves from an institutional product to one heavily traded by and immensely popular with, retail traders.
CFDs allow for flexible, cost-efficient trading by allowing the maximization of trading capital by trading on margin. Profits can be made whether the market is rising or falling by trading either long or short and risks can be limited and managed by Stop Losses and Limit orders. Compared to a traditional share purchase, 0.5% can be saved because there is no stamp duty payable and a single account gives access to a variety of financial markets.
CFDs trading, along with Forex, is among the highest leveraged trading forms across the globe. Both are high-yield trading strategies and make matters pretty complex because of their inter-tradability. Using the pricings of currency pairings as the index, Forex can be traded with CFDs while for the purpose of CFDs trading, the nature of the underlying index – stock index or currency pairing – is irrelevant.
With a combined value of trillions of dollars according to estimates, and over 120 currencies being traded every day, Forex is the largest financial market in the world today. Yet, Forex trading is hampered by the increasing per day costs of fees and interests. There is a huge potential advantage in trading Forex with IMMFX through CFDs rather than the traditional Forex platforms because it allows for a single, unified currency.
CFDs make trades possible in the ‘home’ currency which saves both hassles and costs for the trader as they don’t have to hold balances in different currency types and are saved from converting between currencies. Speculations on currency fluctuations can be more costly the traditional way, as there might be another potential layer of commissions when the currencies are converted and the prevalent exchange rate might not always work in the trader’s favor when a position is closed.
The baseline for a trader’s index is the price point at which the trade was entered on the currency pairing when CFDs are used. This provides a more streamlined investment product with all the benefits from the margin, but without the layers of commissions, fees and multi-currency conversion and management hassles.
Newly styled ‘CFD Forex’ brokers are cashing in on the various advantages offered by CFDs and are providing a very viable alternative to regular Forex for traders with a lot more flexibility. Forex markets can be tremendously exciting with their fast pace, and the potential for profit is huge, but the trading should be tempered through the balancing act of contracts for difference.
However, both CFDs and foreign exchange trading carry significant levels of risk to a trader’s capital. It is important to understand all the risks involved, and to understand the fact that trading in these products might not be suitable for everyone – no matter how tempting – and there is a very real possibility of losing more than was initially invested.