CFD Trading Explained, Simply

A CFD (Contract for Difference) is an over the counter agreement between two parties to exchange the difference between the opening and the closing price of that contract at the close of the contract based on the underlying share multiplied by the number of shares specified in the contract. Despite sounding like it is going to be very complicated it is in fact easy to come to terms with. Institutions and hedge funds have utilised Contracts for Difference in the UK stock market for just over ten years instead of regular share dealing. There are many points of similarity between CFDs and spread trading in that the both of them are margined products so you can gear yourself up or actually take a decision that is a multiple of your available funds.

 

So for example the margin on a firm youre interested in was 10%, establishing a position of £100,000 would really only require a deposit of £10,000. Any running profits that you make can actually be used as margin to esablish new positions but any losses would have to be made good by reducing your position or by providing extra funds.

While stamp duty of 0.5% on all UK share purchases has in the opinion of some traders reduced the cost effectiveness of ‘day-trading’ traditional stocks and shares, both CFDs and spread betting are exempt and this has added to their appeal. CFDs are liable to capital gains tax whereas spread bets are tax free, but losses incurred from spread bets are gone for good while CFD losses can be offset against future profits for the purposes of tax. When you trade in CFDs, you purchase those contracts in almost the same way that youd buy shares. So if you wanted exposure to 1,000 shares in a company, youd have to sell 1,000 contracts at, say, 494p per contract rather than simply placing a £10 per point bet with spread betting to get a similar return.

Most CFD providers admit you to post orders anywhere within the bid-offer spread whereas spread betting firms post their own two-way take it or leave it price exactly as a bookie would. Most CFD providers allow you to post orders anywhere within the bid-offer spread whereas spread betting firms post their own two-way take it or leave it price exactly as a bookie would. CFDs do not enfold the costs of financing a position within the spread (as does spread betting) but charge those costs and commissions separately. CFDs do not wrap the costs of financing a position within the spread (as does spread betting) but charge those costs and commissions separately. Because of this, the CFD spread quote will constantly be very close to the underlying price of the share or commodity that you are following. CFDs also mimic nearly every aspect of owning the underlying share or market, so if you hold a position for a long enough time period you will recieve the benefit from any dividends being paid on the shares.

CFDs and spread betting have particular features that will appeal to different trading styles and there is no one best instrument to use. However they should not be regarded as substitutes for long term investment or saving, as more people seek to take control of their financial destiny, theres been a growing realisation that going short is a legitimate means of trading in market thats become progressively difficult to profit from in a traditional sense.

Making Money from Online Investments: Share Dealing, Spread Betting and CFDs

Leading economic commentators agree that the financial crisis we are entrenched in could reach an unprecedented scale, with only the smallest chance of a genuine recovery. Nevertheless there is still the opportunities for traders, investors and enthusiastic amateurs to earn a good income by making use of the variety of online share dealing and trading websites that have revolutionised our access to the stock market.

The history of our global boom and bust economy shows that the periods of downturn always mean the weakest links in the chain don’t survive. Only the strongest and most adaptable survive. Well, this applies to investors as much as businesses. In the past, if an individual wanted to buy and sell on the stock market, the fees involved could become exhorbitant. There are brokers who would take a 20% cut on investment profits in addition to a 2% fee annually. That can turn a 10% return into just 6% – even less depending on your management fees. This is magnified by the fact that the stock market collapses of late have reduced the levels of profit being made by investors. Investors today are struggling to earn the kinds of profits they were just a few years ago by traditional means.

But times, they are a changing. As the digital age matures, we’ve got access to instant real time information, high speed internet and sophisticated trading software. Essentially this means cutting out the middle man and recovering some of those lost profits for yourself. Online share trading services allow you to manage your own portfolio at minimal cost.

The other great thing about having your trading portfolio online is being able to look at your investments from along term point of view. It’s a far smarter approach than only looking at the short term quick wins

A consequence of the lack of predictability of the markets in the current financial climate, means that trading techniques such as financial spread betting are also on the rise. Rather than buying shares at one price and selling when they rise, spread betting doesn’t involve ownership at all; you simply bet on whether and how much the price will rise or fall. There is no doubt risk involved – yet skilful spreadbetting decisions can mean significant profits. A variant of financial spread betting is CFD trading, or Contracts for Difference. These are, quite simply, contracts between two people where each agrees to pay out on the difference between initial and final stock prices over a period of time. Both are an increasingly appealing option to actual share ownership for many investors. They are both also really simple to get into online, which has also lead to the increasing usage of online CFD trading and spread betting of late.

The moral of the story? Exactly like businesses and corporations, individual investors need to be thinking about cutting their costs, improving efficiency and looking for new opportunities. As far as safeguarding yourself against the slings and arrows of outrageous recession is concerned, the strongest tool in your belt might be to switch to online trading.