Posted by admin on June 28, 2017
Contract for difference refer to derivatives that aren’t traded on an exchange, but they traded in an over-the-counter market by CFD providers. A CFD offers investors a chance to speculate about the future movement of the asset without owning it or taking the physical delivery of the asset. In other words, CFDs serve as leveraging instruments. They are available for a broad range of assets including shares, currencies, and commodities. Typically, a CFD involves two major things;
- Entering into an opening with a CFD provider at one price which creates an open position that you will be required to close later. You only close the position with a reverse trade with the CFD provider but at a different price.
- If your first position was a buying position, then your position which closes the trade shall be a selling position. Conversely, if your first position was a selling position, then you close the trade by adopting a buying position.
CFD Trading and Beginners
I know the big question you must be asking yourself at this particular point is whether CFD trading is suitable for beginners. The answer to this query is both a yes and no. CFD isn’t suitable for beginners who are naïve about the trade. However, if you are a beginner but you still find time to understand what is involved in CFD trading then you are good enough to try it out. The key point here is that you must understand what CFD is all about, the risks associated with it and the benefits associated with it as well. With a thorough understanding of the trade, you can make an informed decision whether the product is good for you.
The difference in finance rates between trading CFDS and trading shares
The financing component doesn’t come up when you are trading shares because you only pay to finance on shares if you take out a margin loan. On the other hand, when you are trading in CFDs, you are required to place a small margin up front to help you gain control of the entire position. Therefore, trading in CFDs involves taking out a loan every time you open a trade and hold it overnight.
Holding the CFD position Versus Holding for several days
Most brokers only charge you finance fees if you hold a position past the New York’s close time. Closing your position before the New York close ensures that you won’t pay CFD finance fees. This implies that if you hold your position for several weeks, you pay the CFD finance fee every single day that you hold the trade opens. Most of the CFD providers opt to charge a pro rata rate instead of the margin loan. You don’t to apply for a credit rating to get approval to trade CFDs.
As of April 2017, the CMC Markets was charging what they referred to as a holding cost if you hold your position past 5 PM New York time. According to the company website, this is not a financing charge as most people may refer to it. The holding cost for CFDs and Forex trades is calculated differently.
A point to note is that CFD finance charges differ on a daily basis as your position rises and falls in the market. The best way you can avoid the CFD finance fees is by opening and closing your share CFD position within the same day. You do not have to pay the financing because you never held the position overnight.
Is CFD for everyone?
Contract for Difference is not for everyone. Do not consider CFD trading if:
- You do not understand all the factors that may affect CFD prices in the market
- You are too occupied to monitor the markets closely and identify significant trends that may help you to trade successfully. You need to be in a good position to respond to margin calls to cover your losses at short notice, or you risk having your CFD position closed at a loss.
- You do not understand all the risks associated with CFD trading.