- CFD(Contract for difference) is a type of financial derivative that allow traders trade a wide range of financial instruments(Shares, Commodities, Currencies, Indices or Treasuries etc) without ownership of the underlying assets. CFDs prices mirror the underlying instruments, so traders actually trade on the price movement of these instuments,but the underlying assets are never owned.
- CFD Trading is done over-the-counter with CFD brokers. (Over-the-counter (OTC) or off-exchange trading is done directly between two parties without an formal exchange such as New York Stock Exchange, NASDAQ, U.S. Futures Exchange.)
- Trading cost for traders include: Spread (which is the difference between the buy and sell price), commission(Only applicable for shares), overnight financing(also called hosting cost, charged at the end of each trading day, it can be postive or negative), Market data fees (for certain instruments, traders may need to pay market data fee)
- CFDs are currently available in Australia, Austria, Canada, Cyprus, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, The Netherlands, Luxembourg, Norway, Poland, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and New Zealand.
- In the United States, under the Dodd-Frank Act, CFDs are considered to be “swaps” or “security-based swaps”.
- Advantages of CFDs
- 24 hour Trading
- Low entry threshold. Contract sizes of CFDs are smaller, so it’s more accessible for small traders.
- Higher maximum leverage & Traded on margin & Low margin requirements. CFD Brokers offer higher maximum leverage than traditional stock brokers or futures brokers.If traders choose to trade with a high leverage, only a small amount of money is required to take large positions. In other words, traders can take a small deposit(namely, Margin) and using it as a lever to borrow and gain access to a larger equivalent quantity of assets. Higher leverage also means that both profit and loss will be magnified.
- No shorting(selling) rules. Traders can choose to short(sell) or long(buy).
- CFDs make it much easier to access global markets. A wide range of underlying instruments(shares, indices, commodities, currencies and treasuries etc) are offered in one platform.
- Disadvantage of CFDs
- Compared to stock brokers or futures brokers, CFD brokers are not highly regulated, so traders should trade with a trustworthy & reliable broker.