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Benefits of CFD Trading

CFD’s also referred to as contracts for difference has gained huge popularity in the past few years.

Author: Percy Smith
Date: Apr 11, 2011 - 9:56:39 PM


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CFD’s also referred to as contracts for difference has gained huge popularity in the past few years. CFD is nothing but an agreement between the buyer and seller agreeing to exchange the difference in the current value of a share, currency, commodity or index and its value at the end of the contract. As long as this difference is positive, the seller would pay the buyer. On the contrary when this difference becomes negative, the buyer loses his money.

These contracts were developed during early 90’s in London and were used for hedging funds by institutional and retail investors. However, trading in these instruments is not permitted in US due to restrictions imposed by US Securities and Exchange Commission.

Despite the restrictions imposed in few countries, spread betting is highly popular. Unlike share trading, investors trading in share CFD enjoy high growth rate while lowering the financial commitment of an individual. In other words, CFD trading spreads the risk of losing money thereby allows the investors to speculate price movements. Unlike shares, CFD trading is done on a margin. So, investors only need a small proportion of total value of a position to trade.

Besides this, contracts of difference provide an excellent opportunity for short term trading strategies and this is why they are most preferred amongst hedge funds. One of the most attractive features of CFD trading lies in the access it provides to foreign markets and various other trading instruments. Since the risk involved in this trading is negligible, beginners are encouraged to trade in these instruments. However this does not mean that these investments are risk free.

Investors stand a chance to lose money because of the highly volatile nature of these instruments provided they do not use stops. In fact almost all providers suggest their traders to use stops in order to minimise their risks, control their leverage and enjoy the benefits of best trading.

There are few disadvantages of CFD trading as well. First and foremost being unregulated nature of this market. As a result there is no real undertaking asset being purchased to which legal rights can be obtained. Another major threat is, levying of overnight fee for holding these instruments for longer period of time.

Benefits of CFD trading include:

Unlike share trading, there are no fixed timings for contract trading, so investors can place their trades almost at any hour of the day.

Execution here takes place almost instantly so you need not wait hours or days together.

Another advantage of this trading is that you can make profits both from rising and falling prices but only if you have mastered the art of dealing in these securities.

A responsible risk manager with an ability to conduct more realistic trade can alone assure you guaranteed results. Another form of trading that is growing in popularity is Forex trading. This deals with trading currencies from different countries against each other. This kind of trading allows trader to choose a pair of currency which you expect to change in value and place in which you trade.

  Percy Smith is the author of this article on Share Trading. Find more information about Singapore Shares here.



View all articles by Percy Smith

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