CFD TRADING INFORMATION

Below you will find information on CFD Trading.

        

What are CFDs?

CFDs is the shorter version of Contracts for Difference. This is a type of investment contract, which allows the investor to trade shares without actually taking ownership of them. Here's how it works:

The investor signs up with a broking firm and opens a trading account. He (or she) then makes a contract with the broker. This is an agreement to exchange the price difference of a stock between the time the contract is opened, and when it is closed.

You can trade global stocks and shares, indices, foreign exchange, and sectors with CFDs all of which can be traded from a single trading account.

When the investor opens a contract, he pays a margin to the broker. This means he pays around 10% of the share he wants to trade. The remaining 90% will be 'lent' by the broker.

The CFD contract allows the investor to 'guess' the direction of movement on these. If he is correct, he wins and makes a profit. If his 'guess' is incorrect, he loses meaning he owes the broker the losses of the entire contract.

Why Trade CFDs?

CFDs are financial instruments. They offer the investor exposure to many global markets but at a much smaller percentage of what it costs to actually own a share. There is no fixed expiry date to the contract at the end of each trading day, the investor chooses whether to close the position or to roll it forward to the next day.

CFDs are traded on leverage, which could be seen as a very efficient use of your money. You can use a relatively small proportion of the total value of your position to secure a trade while retaining your exposure to the market.

Not only that, but you can profit from fall markets as well as rising ones. This means you have a more flexible way of investing.

What do Long and Short mean?

You can use the 'Long' option on your position this means you are buying an asset in the expectation that it will rise just as you would when you buy a regular share.

You can also use the 'Short' option on a position this you are selling an asset with the intention of making a profit from falling prices. It is virtually impossible to 'short' in the ordinary share market.

What does Trading on Margin mean?

Trading on margin means that you open a position by only paying a percentage (rather than the full value of the transaction) this is called the initial margin. This margin allows for leverage meaning you can access a larger amount of market assets than you would if you were to buy them directly (such as shares).

On all of your open positions, you must maintain the margin at a pre-set level. If the market moves against your position and your cash balance is reduced below the required margin level, your broker will make a margin call. This means you are required to pay additional money into your account in order to keep the position open or they may demand that you close your position.

Are CFDs Good for Long Term Investment?

CFD trading is best used as a short-term investment tool, due to their being traded on margin. Traders are charged interest on their bets so the longer a position is kept open, the more interest will build up. This could make the position expensive to maintain.

How Much does it Cost to Open an Account?

The minimum deposit required to open a CFD account varies according to the broker it can range from $100 to $10,000. The amount of capital you need to open an account is relatively low, thanks to leverage.

There is no capital gains tax on CFDs they are treated as a profit (or loss) against your assessable income.

Do I have to Pay Commission?

Commission fees depend on the broking company. Some offer zero commission, others may add this fee. Find out when you are looking for a good broker.

What are the Advantages of CFDs?

  • Easy to trade
  • No Capital Gains Tax (CGT)
  • No fixed contract size
  • Straightforward strategies
  • Earn profit on falling markets

What are the Disadvantages of CFDs?

  • High risk factor
  • Not good for long-term investment
  • Could lose more than you initially invested
  • Market volatility

What Risks are there to CFDs?

CFDs do pose a large level of risk to the investor, mostly due to the 'double-edged sword' of leverage. In other words, while you can make major wins, you are also at a constant risk of not only losing your initial deposit but you may finish up having to make additional payments to the broker to cover a loss.

We have outlined CFD risks in a separate document see CFD Risks in the Info Library. Anyone considering CFDs as an investment trade should consider the risks before starting to trade with real money.

        


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