CFD contract and what to do with it?
We are happy to welcome you, dear traders!
With today's material we open a series of articles as part of the course "CFD tradingThe "CFDs" section of the website, which describes all aspects of working with CFD contracts, their advantages and disadvantages. We hope they will be useful and interesting for you.
Course outline
Chapter 1: What are CFDs?
Chapter 3: Principles of CFD Trading.
Chapter 4. Pros and cons of CFD trading.
Chapter 5: Basic Differences between CFDs and futures.
Chapter 6. The similarities and differences between trading CFDs and currency pairs in Forex.
Chapter 7: Differences Between Futures Trading and the Forex Market.
Chapter 8: Basic CFD Trading Strategies.
Chapter 1: What are CFDs?
Although CFDs have been around for over 20 years, they have only recently become popular. I, for example, have recently encountered this concept and I offer you to deal with it together. So, according to the all-knowing Google,
CFD or Contract For Difference - is an agreement between two parties to exchange the difference in value between the opening and closing price of that contract when it closes.
In other words, CFD is an ordinary agreement between the seller and the buyer that the difference between the prices of the contract at the time of opening (buy) and closing (sell) will be paid. The purchase in this case can be commodities, stock indexes or shares, and the amount of profit or loss depends on the price difference at the opening and closing of the position.
How does CFD work?
Let's look at a simple and straightforward example. Suppose the contract specifies that the seller will pay the buyer the difference between the current value of the product and the price by which it will change after a certain time specified in the contract. That is, the buyer expects the price of the product to go higher over a given period of time. If the buyer's assumptions are correct, he benefits in the form of the price difference. If his calculations were not correct and the price decreased, the difference must pay the buyer himself. Thus, CFD provides an opportunity to open both long and short positions.
The properties of CFDs resemble those of futures contracts. But with some differences. For example, contracts for difference do not have the volume and the fixed date of expiration (the date of completion of the transaction). Taking into account these differences, CFD contracts can be really considered convenient for trading commodities, futures, shares and indices.
Essentially, CFD is a marginal product, which allows you to receive a higher yield through the provision of leverage, with a margin of 1 - 20 % of the nominal volume of such contracts on the underlying stocks. The beauty of leverage is that it allows making transactions for amounts many times greater than the security deposit. This leads to a simple conclusion - it is possible to work with CFD even with small capitals. That is why these contracts have become popular in the sphere of Internet trading.
It's a kind of credit purchase. You use leverage, but you pay a certain percentage that you deduct from your trading account. A kind of bank commission for using a credit card.
Considering that not everyone can afford to trade real shares to get rich quick, CFD became a breakthrough. Its emergence has expanded the market for those traders who have small capitalization, but have knowledge, experience, and skill to make money.
Pros and cons of CFD
After all working with CFDs, you do not own the stockYou do not own the asset itself, the value of which the stock carries. But you can receive income from changes in the price of that asset. That is what a contract for difference allows, which is a derivative function of the share purchase operation. A trader can buy and sell and make profit or loss due to price change of the asset. This type of trading has a qualitatively low cost and is quite convenient. Trading stocks carries a high risk because there is no possibility to hedge them (opening of opposite transactions for insuring profit from the change of prices on the market during trading operations). This is one of the positive qualities which distinguish stock trading from CFDs. In CFD you can hedge risks.
In addition, the advantages of working with such contracts may also include the possibility of working with CFD contracts anywhere in the world. The main thing is to have access to the Internet.
As for the disadvantages, they all have them. The disadvantage of CFD contacts is speculationThe probability of making a profit and incurring a loss are practically equal.
Should I choose CFDs for trading? It's too early to decide. The only thing we can say for sure is that CFD contacts - is not a new, but very interesting financial instrument, and its positive qualities allow us to hope for success in its use.