CFD Trading
A Contract for Difference or CFD is a type of trading agreement between two parties. The way this type of agreement works is the difference between a contract’s opening price and closing price is exchanged on the market. This is a type of derivatives product which permits you to trade on the price movements that occur to a contract. You do not need to own the underlying product that is the basis for the contract.
One way to use a CFD is speculate on future movements of market prices regardless of any underlying market activity. This means a trader is able to short or hedge their portfolio. Shorting is when you have sold to profit when prices fall. Hedging a portfolio is selling to offset potential losses which could occur to any physical investments.
A CFD is a leveraged product that enables any trader to pay a small portion of the total value of a contract on the market. This is a strategy which can be used to increase the return on investment. The ability of an individual trader to leverage an investment means there is a chance that losses could be greater than their initial deposit. There are many features of CFD trading that a trader should know.
One aspect about a CFD trade is the ability to go long or short. Going long is a strategy used is you are thinking that market prices will be rising. If you believe market prices will be falling, then shorting can be a good strategy. This type of trading is a flexible alternative to making a trade on any movement of market prices. You can benefit regardless of a rising or falling market.
Hedging a portfolio is another aspect with trade CFD strategies a trader can consider. Losses which are likely to occur to an existing portfolio can be offset by short selling. A CFD trade may be used to make a trade that could potentially offset any drop in value of assets in a portfolio. However, there needs to be a drop in the price of the underlying instrument to make hedging successful.
A CFD is a great way to be tax efficient. The losses that occur in the market can be used to offset your CGT or Capital Gains Tax liabilities. Independent investment advice is needed to decide is this may be a suitable solution.
Leverage is the basis for any CFD trade. This means a trader is only paying a small portion of the value of the trade when opening a position. The benefit is not having to pay the trade amount in full. A CFD trade will typically have a margin of starting at about 1 percent. One aspect of using leverage will be a means to increase your return on investment. The initial deposit for a trade does not have the same exposure as a full trade. However, any losses are also increased the same way. This means an unforeseen loss could be more than the initial outlay for a trade.
One interesting aspect of a CFD is a trader does not own the underlying financial instrument. This will have an additional benefit to traders as there is no stamp duty that needs to be paid. You will save up to 0.5 percent of the total value of any trade. However, tax laws are subject to change. If you are residing in the United Kingdom, then you are free from any stamp duty. The only exception is when you have a trade for an Irish stock. Irish stocks are charged 1 percent of the notional trade value. You are refunded this value if you trade out within a 30 day period.
