WHAT IS CFD?
CFD stands for Contract For Difference and is a type of security that allows two parties to exchange between themselves the difference in opening and closing prices of any contract. A CFD trading allows a trader to speculate based on the rise or fall in prices of global financial markets, such as Forex, indices, commodities, shares, and treasuries. The contract is settled using cash, instead of physical goods or securities and this is an easier approach to settlement, which brings favorable tax conditions and the ability to speculate on declining prices.
CFDs are offered in numerous nations such as Australia, Canada, Cyprus, France, Germany, Hong Kong, Ireland, Japan, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, and New Zealand. They are not permitted in some other countries, like, most notably the United States, where retail investors can not trade CFDs due to rules about over the counter products, unless on a regulated exchange but there are no exchanges in the US that offer to trade CFDs. Instead, U.S. traders are forced to trade the futures markets, where the margin requirements to open a position are much higher and unattainable for the average investor.
Benefits of Trading CFDs
Below are listed the benefits that a trader can have from trading in CFDs vs. conventional means of trading:
- Trade on leverage
- Low Fees
- No Stamp Duty
- 24/5.5 Markets
Trade on leverage
CFD contracts provide access to leverage, and this allows investors to generate high returns with a small initial deposit. However, leverage can also generate losses that exceed deposits. The typical leverage is 25 times the deposited amount, and this means that a trader that hold a position for 100 000 only needs to deposit 4000 to their CFD trading account.
CFD trading offers lower fees than traditional investing or trading as the investor is not buying the actual underlying financial asset, rather the investor is speculating on the price change. This means that in general only the spread is paid to transact. The spread of a CFD is the difference between the buy-price and the sell-price, and it is derived from the underlying market, and most CFD brokers add a markup to the spread.
No Stamp Duty
Trading in CFDs does not include any stamp duty since these types of contracts are a replica of the underlying product such as a futures contract or a share. Therefore, investors who choose to trade in CFDs will avoid the tax liability that they would incur by trading in the underlying instrument.
Last but not the least, trading in CFDs takes place 24 hours a day, five and a half days a week. Even if the underlying market remains closed, a trader can sometimes still trade CFDs.