Contract for difference
A CFD is an agreement to exchange the difference between the opening and closing price of the position under the contract on various financial instruments. CFD trading is an effective and convenient speculative instrument for trading shares, indices, futures and commodities.
The main feature of CFD is that the instrument under the contract is not really shipped in the process of trading. It means that, for example, you can buy a contract for difference (CFD) on 200 shares of IBM instead of buying 200 shares of IBM on an exchange. It is convenient because you can make a deal concerning offered financial instruments at any moment and to the full extent, which would be difficult in case of trading actual exchange contracts.
Such contracts are getting more and more popular in the world's trading practice because they allow traders both to get speculative profit and to hedge their investment portfolios in case they are unprofitable. The latter can be done in those cases when the investor makes a loss from the shares of some companies, but does not want to sell them. In this case he has a great opportunity to hedge his risks by making a contract for difference on the shares of this issuer thus securing himself against further losses and leaving his investment portfolio unchanged.
CFD is a margin product. In other words, all deals with these contracts are made according to the same pattern as those with currency on the FOREX market, including providing certain leverage. Deposit margin may differ for various instruments.
The basic CFD advantages are:
Short trades Contracts for difference allow traders to go short as easily as long, which was earlier available only for professional investors. But with the help of CFDs, short positions become more effective regarding their cost and simpler regarding their establishment than share dealing. *
Low commission and margin requirements You can perform operations without having a deposit that covers the entire sum of the contract, but only margin that is 5 - 10 percent from the amount of the contract. This allows you to make portfolio investments without binding all your funds. *
Hedging If you have some shares you do not want to sell even in case you expect their price will go down, you can just go short under a contract for difference on this share (or portfolio). In this case you will compensate the losses you will have with your basic holdings by the profit made with the corresponding CFD. *
Market prices While working with CFDs instruments, you get market spreads without any extension and it allows you to trade at the prices that stock professionals make their deals at. *
Quick dealing With CFDs, all deals are made at once without waiting for execution. *
Deal size The minimum deal size with a CFD is 0.1 lot = 10 shares.