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CFD trading centre


A contract for difference (CFD) is a contract between two parties in which one pays the other a certain sum of money based on the difference between the current value (price) of the CFD's underlying financial asset and its value (price) at a specific future date.

If the difference is positive, the CFD provider pays the CFD buyer, whilst if negative, the CFD provider receives the sum by the CFD buyer.
CFDs can be considered as financial derivatives that allow market participants (buyers or sellers of CFDs) to take advantage of the underlying prices uptrend (for long positions on CFDs or a position traded to take advantage by an uptrend of the underlying asset ) or of the underlying prices downtrend (for short positions CFDs or a position traded to take advantage by a downtrend of the underlying asset).

CFDs are traded daily in Europe and in Asia but not in the USA because of SEC's restrictions.
Considering the complexity of CFDs , trading is more advisable for professional and experienced market participants rather than individual retail investors (see recent Esma/Eba/FSA warnings http://www.esma.europa.eu/news/ESMA-and-EBA-warn-investors-about-contracts-difference).


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Functioning and risk


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CFDs trading examples


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Using CFDs for active investment management

- short trade example
- long trade example
- diversification

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CFDs trading rules to become a better investor





CFDs are available on a huge range of underlying financial assets:

  • CFDs are flexible and not standardised financial instruments;
  • Due to gearing, CFDs are suitable for experienced traders;
  • CFDs are similar to financial futures contracts without an expiration date;
  • CFDs trading is conducted on a leverage basis: to open a CFD position, you need to deposit a % of the total value of the trade : normally 5-10% margin for shares and 1% margin for indices;
  • If the CFD position is kept open overnight, if you are long of a CFD, you are entitled to receive dividends (if paid on the underlying asset) but you have to pay the daily financing cost; the opposite happens if you are short of a CFD;
  • CFDs are usually traded mirroring underlying cash price and this allow market participants to access worldwide financial markets by depositing just the initial margin;
  • There are no restrictions to enter or to exit from a CFD position if the trade happens during relevant market trading hours for the underlying asset;
  • CFDs can be closed by reversing the initial CFD position;
  • CFDs trading is risky due to the leverage mechanism;
  • CFDs trading costs involve:
    - trading commissions,
    - initial margins to be deposited and margin calls to be eventually managed
    - a fixed annual fee to access financial markets on your PC
  • CFDs are not standardised financial derivatives, so commissions and margins can be different for each CFD provider;
  • In the UK CFD implies the payment of the CGT but not of the stamp duty

 

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