A CFD (or Contract for Difference) is a well known and popular way of trading. CFDs offer a higher level of leverage than other forms of trading, starting with as low a margin requirement as 2% right up to as much as 20%. They should have enough experience and expertise to know what suits the trader best. The current disadvantages of the ASX exchange traded CFDs and lack of liquidity means that most Australian traders still opt for over-the-counter CFD providers. Calling stop loss at the right time and reducing losses is important because a CFD trader knows that he needs to live to fight another day.
Variation margin can, therefore, have either a negative or positive effect on a CFD trader’s cash balance. It is also to be noted that CFD trading is as much risky as it is profitable and not suitable for beginner traders. In this case, the CFD provider would pay the equivalent of the dividend to anyone holding a long CFD position and deduct the equivalent from anyone holding a short position. Financing Cost - CFD is more suited for traders adopting short to mid term swing or momentum trading strategies than for investors who adopt a long term buy and hold” strategy as CFD brokers impose a financing cost on the contract value.
Instead, what the trader does is to initiate a contract between himself and the CFD broker whereby he agrees to be paid (in the case of profit) or pay (in the case of a loss) the difference in price when the contract is closed. One of the similarities with spread betting is that although there is an expiry date of the contract, it can be closed by early by either party – the private trader or CFD broker. An online broker that the trader chooses to trade CFDs should have a deep knowledge of the markets and match the traders’ needs when the market changes. CFD brokers, like spread betting companies, offer their clients the ability to trade using leverage. Market makers operate traditional spread bets where the trader must trade against the CFD provider, and on their displayed prices. In the UK the CFD market mirrors the financial spread betting market and the products are in many ways the same.
The majority of CFD brokers offer a choice of products across all of the major global markets, allowing investors to make trades in any market that they choose from the broker’s own trading platform. It is rare for fees to be charged by trading CFDs and many brokers charge no commissions on entering or exiting a CFD trade. Some financial commentators and regulators have expressed concern about the way that CFDs are marketed at new and inexperienced traders by the CFD providers. No Shorting Rules or Borrowing StockCertain markets have rules that prohibit shorting at certain times, require the trader to borrow the instrument before shorting or have different margin requirements for shorting as opposed to being long. While trading short can be an issue in some kinds of assets, markets, and exchanges, there is never an issue in trading long or short when it comes to CFD trading.
The CFD providers started to expand to overseas markets with CFDs being first introduced to Australia in July 2002 by IG Markets and CMC Markets. Depending on whether the trader is holding long or short positions, he could be paying or receiving interest while the CFD contract is still open. DMA CFDs can be more expensive as the CFD provider needs to cover the exchange transaction fees
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