The CFD, or Contract for Difference, is an investment instrument that allows traders to participate in the price movement of securities or Indices without full ownership of the underlying stock or index. Similar to a future on a single stock or index and to trading stocks on margin, CFDs are an efficient approach to market participation. One can just as easily sell the stock index or security short as buy it. Online traders increasingly look to this rapidly expanding investment opportunity.
Contracts for difference (CFDs) use leverage to provide maximum market exposure for a small initial outlay.
Trading CFDs gives you the freedom to trade companies, indices, currencies and commodities across Australian and international markets using a single trading account. They let you exchange the difference in the price of an underlying instrument (such as a share, index or commodity) between the time a trade is opened and the time it is closed.
CFDs allow you to trade on whether the price of a financial instrument is likely to go up in value (strengthen) or go down (weaken). Whether you make a profit or a loss is determined by the difference between the buy price and the sell price of the instrument you're trading. While it is possible for you to pay just a small percentage of an instrument's value – or margin – your profit or loss is the same as if you owned 100% of the physical instrument.
You are only required to deposit a small percentage of the overall value of the trade. The smaller the margin, the greater your leverage. Using leverage provides the potential to magnify your profits. However, it is important to remember that any losses are also magnified. It is important to use risk-management tools like stop loss or take profit orders to help control your risk. Minimum CFD margins typically fall between 1% and 15%, providing significant levels of leverage.
CFDs offer a number of advantages compared to traditional stock trading. The capital requirement is considerably lower, as the account only needs to be funded with the initial margin requirement to start trading. With CFDs, it is possible to go both long and short, offering potential to make money in a falling market.
CFDs offer a number of advantages compared to futures trading. One of the main differences is that the CFD contract does not have a fixed expiry date like futures trading. Traders will experience CFDs as being more transparent and flexible.Concerns have been raised regarding non-professional investors trading CFDs.
We, at FxEthos, do not recommend that clients trade CFDs without prior experience with trading in the financial markets. CFDs are a complex product and the high degree of leverage implies that a trader should not trade for more than what can be afforded. We do also not recommend that clients are fully leveraged in CFDs.