What is CFD?

Jetheat

Active member
174 0
I know CFD is Contract for Difference and I know that when you buy a CFD for a particular Stock you are actually buying the performance of that stock.

Does this mean that when you give your money to the broker and instruct him to buy 1 contract in BT, you are buying something physical like a chunk of BT or something competely intangible (just like an option)?

Is there something physical which you possess when you buy into a CFD contract?
If not, who does your money go to, BT or brokers or exchanges?

Appreciate info that can help me get things straight in my head.
 

Jetheat

Active member
174 0
MM? Who is that?

I still don't get who the money goes to. Who wins or loses by taking your contract?
 

Jetheat

Active member
174 0
Thanks for that but it still doesn't explain who a Market Maker is and how he fits into the equation of Buying between me and the item being purchased.

Can someone please explain.

Thanks
 

raf110

Member
63 1
OK.

CFDs are traded OTC (over the counter), there needs to be both a buyer and seller for there to be a transaction.

MM are on the other side of every transaction. In effect your counter party is the MM. The MM will require margin (just as claering firms do) to ensure that you can meet your obligations.

The best way to understand is if you were to buy a forward foreign exchange contract from your bank (MM) you would have to pay your bank margin.
 

trogers

Newbie
2 0
As well as the performance long or short you get the equivalent of all the corporate actions, divvy, rights (good for divvy stripping)etc but not the ownership, voting rights etc.
 

brands

Newbie
1 0
I'm a newbie to CFDs. Read from brokers website that if I sell a CFD contract, the broker will pay me interest. Just wondering, where did the broker get the money to pay me interest??

If I shortsell CFD, how did the broker hedge his position? Getting very confused by these technicalities......hope someone here can enlighten me.
Tks.
 

raf110

Member
63 1
brands said:
I'm a newbie to CFDs. Read from brokers website that if I sell a CFD contract, the broker will pay me interest. Just wondering, where did the broker get the money to pay me interest??

If I shortsell CFD, how did the broker hedge his position? Getting very confused by these technicalities......hope someone here can enlighten me.
Tks.

The broker has a number of positions open, both long and short. They pay interest on short and receive interest on long positions. The net effect is the broker will be more or less even.

Most brokers do not hedge there positions, but if they wanted to hedge a short position they can either go to another broker and sell CFDs or short sell the physical shares.
 

neil

Legendary member
5,167 747
Jetheat said:
Thanks for that but it still doesn't explain who a Market Maker is and how he fits into the equation of Buying between me and the item being purchased.

Can someone please explain.

Thanks



A quick search on "Google" came up with this:


http://www.google.com/search?hl=en&q=what+is+a+market+maker



Didn't they answer your query over at "Elite Trader" - I see you had several replies :?:

http://www.elitetrader.com/vb/showt...1&highlight=what+is+a+market+maker#post498131



More education:

http://www.londonstockexchange.com/help/glossary.asp

http://books.global-investor.com/pa...QuickSearch&Status=Searching&ginPtrCode=10136

If you use the "search" facility on "Google" etc it is surprising the amount of info: you can find, plus, the last link above, highlights at least one book on the role of market maker and his/her relationship to others.

Good luck :cool:
 

trogers

Newbie
2 0
A CFD is essentially like a morgage; the broker is lending you money to buy shares when you go long of a CFD, so you pay interest, and when you go short you are essentially lending the shares to the broker (it is only a contract so you don't need to own them in the first place) so you receive interest. Note that these rates are pinned to the base rate and usually the broker will pay out slighly less interest than they actually receive, i.e. like a mortgage broker they make money on the rate they get wholesale and the rate they give you long or short.
 

forexster

Newbie
6 0
so what are chances of a person wining? cause its between You VS MM, doesnt that mean MM can fake the share price and make you lose, after all you wont have MM if it wasnt profitable for them?
 
 
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