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CFDs Explained |
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CFDs (Contracts for Difference) are a derivative that lets investors speculate on a range of financial markets, such as stock market indices, including the FTSE 100, Dow Jones etc., shares, forex, commodities and government bonds, without owning the actual financial instrument in question.
With shares CFDs, trading is an agreement that allows you to exchange the value differential of a share between the opening and closing time of the contract.
CFDs Explained - Going Long or Short
CFDs allow you to go long or short. Going long is a way of saying ‘buying’ or speculating on a market to rise. Going short refers to ‘selling’ a market, ie speculating on it to fall.
For example, if you believe that the underlying price of a market will rise, you can buy; if you believe prices will fall, you can sell. Going short, therefore, allows you to potentially make profit on a falling market.
CFDs Explained - What Are CFDs - Leverage
CFDs are a leveraged product. If you trade traditional stocks and shares then when you buy shares in a given company you are required to pay the total value of the shares, plus, depending on your share trading platform, stockbrokers’ fees, commissions and stamp duty.
With CFD trading you don’t put down the full value of the trade. CFDs allow you to place a deposit that commands a potentially larger financial position.
Depositing a fraction of your total trade value still gives you full exposure of any price swings and therefore can result in enhanced financial gains or losses. The typical profit (or loss), after all, of your CFD trade is the total value realised once you close your CFD trade minus any broker’s commissions. Although note that some brokers like InterTrader do not charge commissions.
Like spread trading there is no stamp duty* on CFD trades. However because Contracts for Difference and spread trading are both leveraged forms of investment, they carry high levels of risk and it is possible to incur losses that are in excess of your initial investment.
CFDs Explained - Managing Risks
Leverage can lead to both enhanced profits and losses, depending on the movement of the market and your trading decisions. Leverage is one of the main attractions of CFDs for many investors. Note though that you can limit your potential losses by using a number of risk management tools.
A commonly used risk tool is a ‘guaranteed stop loss’ order. A guaranteed stop loss order will automatically close a CFD trade once it hits a level that you can set. Therefore if a market moves against you, your trade will be closed and your losses limited. A guaranteed stop loss order is also useful because it doesn’t put a limit on your potential update, only your downside.
CFDs Explained - The Brokers
We offer a range of broker reviews on CFDs Online, simply click on the company in question for the latest review:
Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.
CFDs Explained, last edited by F. Lawson , 14-Sep-11.
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Warning: Contracts for Difference (CFDs), margined forex and financial spread trading are leveraged products and may not be suitable for everyone. Losses can exceed your initial deposit. Please ensure that you fully understand the risks involved and seek independent financial advice where necessary.
The contents of this website are for information purposes only and not intended as a recommendation to trade nor does the content constitute investment advice. All reasonable efforts have been made to present accurate information. Neither CFDs-Online.com nor any contributing company or individual accepts any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.
* Tax law is subject to change. It can also differ if you pay tax in a jurisdiction other than the UK.
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