Contracts for difference (CFD), as its name suggests, is a contract. This agreement is between two (2) parties, which are the buyer and the seller. However, this article will not focus on the fundamentals or basics of this since people can just refer to other articles discussing this way of trading for beginners. Instead, what this article will discuss is more on the key features surrounding it.
In this regard, there are different features surrounding CFD trading. It may depend on the instrument or method where a trader is positioning. Specifically, this article will discuss trading on margins, market movements, commissions, stamp duty as well as overnight financing and trading on shares or indices.
Trading on Margins
Instead of paying the full amount of value of any transaction, a trader can choose to pay a percentage of it using a margin in order to open a position. The main point here is that the margin allows a trader to leverage. Hence, this makes one to access larger transactions and trades without fully buying the positions.
Trading on Market Movements
On the other hand, another key feature of CFD trading is about trading when the market is rising or falling. This is because this platform allows a trader to go both long or short at the same time. A long trade refers to the position wherein a trader buys a certain asset with the assumption and expectation that its value will rise in the future. A short trade, in contrary, is about selling a certain asset with the expectation or assumption that its value will fall in the coming days or months. However, in contracts for difference, a trader is not just limited to either of the two. As a matter of fact, any trader in this field can go short as well as long trades at the same time.
CFD Commission Treatments and Stamp Duty
Further, other key features of CFD trading are the commission and stamp duty treatments for the transaction. In most countries, traders do not have to pay for stamp duty since there is no physical ownership of the asset. Hence, this saves traders some money.
In terms of the commission, brokers charge this to the total value of the position and not just on the margin.
Overnight Financing
Since traders may engage into this trading through margins, this means that holding a position overnight will subject it for a finance charge. The applicable interest is usually using the London Inter Bank Offered Rate (LIBOR) as reference.
Trading on Shares and Indices
Furthermore, another key feature of CFD trading is that it allows traders to have a view on shares as well as indices. There are even some providers that allow or offer platforms for currencies and sectors trading.
CFDSpy.com is an online trading portal and education site, aimed at making it easier for traders to learn about CFD covering a broad base of different investment types and instruments, and its key features.