In today's volatile market, the prices of all assets are constantly on the move. They fluctuate between high and low very frequently.Many people who get into contractual agreements to buy or sell assets gets into trouble or suffer huge loss due to the price fluctuations. CFD trading is there to rescue buyers and sellers from such peril.
What Are CFDs
CFD refers to Contracts for Difference. As per CFD, the seller will pay the buyer the difference, if any, if the value of the asset at present is more than what it was during the time the contract was entered into. Therefore, if the difference happens to be negative, the buyer will pay the seller. This type of contract is very meaningful and useful in the securities market where the price is extremely volatile. Such contract gives space to the shareowners to put in a deposit on the share without actually buying the share. This deposit is usually five percent of the actual contract value of the share.
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When an open share CFD is closed, the difference between the opening contract price and the closing contract price is what the shareholder ends up with. This way a shareholder can play the market without putting in the whole amount of the share. CFD allows interested parties to trade all kinds of financial instruments. For example, if the customer wants forex trade, the trading is done at spot prices where as for shares the trading is done at bid offer prices. CFDs are traded by exclusive CFD agencies and individual traders. Nowadays, most trade takes place online. In CFD trading, the instrument of trade never goes into the hands of the purchaser.
Advantages And Disadvantages
CFD trading has advantages as well as disadvantages. As it is traded on margin, it gives the customer a lot of leverage because only a small percentage of actual price need to be paid initially. This also means low transaction costs. CFD trade has the facility of fixing on the instrument a "stop-loss order." A stop-loss order is a trigger placed on the share. Once the trigger goes off, the share has to be sold in the market. It is actually a check against incurring losses in the trade. One of the major risks is that if a proper market study is not done, investors may lose money in CFD trade. Of course, this risk is an inherent feature of all sorts of financial trade. Another disadvantage is that the easy accessibility and low cost of CFD trading could lead to overtrading by investors, and they may end up in trouble. Another key disadvantage is that CFD investors do not enjoy the rights of shareholders as actual transfer of the shares never takes place.
CFD trading is ideal for the people who are only interested in trading and making profits out of the shares and other financial instruments. They do not have any interest in actual custody of the shares.
Visit www.igmarkets.com.au, which is one of the paramount CFD trading companies online. The site offers a wide range of resources including details of what CFD is and how they work.
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