CFD Trading Dubai UAE : CFD Trading : Trade CFDs Like a Pro. Your Guide for CFD Trading Platform, CFD Trading Strategies. CFD Trading Tips & Strategies. What’s a CFD trade? What are CFDs and how do they work? What is CFD leverage? What is margin factor? Do Forex traders pay taxes? Is it worth it to trade forex? Do you pay tax on trading forex? Here’s a really simple yet useful tutorial on CFD trading that will get you up and running very quickly if you’re new to CFD trading. By the time you finish this article, you’ll know how CFDs work, what makes them highly profitable, and understand the costs involved in CFD trading.
CFD stands for Contracts For Difference, which is a derivative product, where you profit from changes in the prices of stocks and shares. Contracts For Difference or frequently referred to as CFDs is a financial vehicle gaining in popularity with private traders for its flexibility and features. A CFD has many advantages and for any trader it is yet another useful tool to use in the business of trading.
CFD trading has been used in the stock market for a number of years now but the trading was largely restricted to large institutions. Recently the scope for CFD trading has expanded to include private investors in the action. This enables the small private trader to participate in trading the performance of a stock as opposed to owning the actual equity.
CFD trading has revolutionized the personal share trading industry by allowing traders to enter into a trade without putting up the full capital into the investment. Trading CFDs has allowed traders to have a low cost exposure to equity movements which is especially important for the trader’s bottom line. Depending on which country you’re in this financial instrument attracts no stamp duty. These unique CFD features are an attractive advantage for traders who make a living from the markets.
You must remember that CFDs are a derivative of an actual vanilla price. That is, CFDs derive their value as a result of the price of an underlying instrument or price – such as the price of the actual share or commodity. Therefore CFD trading encompasses gearing and hence this financial vehicle should be used with caution by beginners.
The origin of CFD’s began when the need of non market makers to be able to short stock increased in the 1990s in the equity market. This is the story of the beginnings of CFD trading. Before this push for CFDs by non market makers, only the market makers were able to short stocks and these were mostly large investment banks. The users of this system managed by the investment banks were typically the hedge funds, arbitrageurs as well as other funds utilizing neutral market strategies.
Demand grew out of long contract transactions to be able to short stocks. No stamp duty is paid on CFD trading because no real stock transfer of ownership takes place. And as no actual change of ownership takes place, the trader does not have any ownership rights such as the right to vote. But on the other hand CFDs expose the trader to the real time performance of a stock price including dividends and corporate actions.
Now when traders enter into a trade most CFD firms choose to hedge their position directly into the underlying market for all CFD transactions. This feature may or not be one of the important points in choosing a CFD provider, as some may not hedge all positions. It is your decision whether you will risk having a provider that hedges every trade or simply a provider that hedges some trades. For those providers that directly hedge all their trades, CFD liquidity is almost always a reflection of the liquidity of the underlying stock in its underlying marketplace. And with today’s technology, CFD trading transactions are instantaneous.
Contracts For Difference or frequently referred to as CFDs is a financial vehicle gaining in popularity with private traders for its flexibility and features. A CFD has many advantages and for any trader it is yet another useful tool to use in the business of trading. In this second part of our introduction to CFDs we have a look at what CFDs are and the part they play in CFD trading.
The CFD is simply an agreement between two parties to exchange the difference between the opening price and the closing price of an underlying share once the contract has been closed, this value being multiplied by the number of shares specified in the open contract. CFD trading uses this basic principle to make leveraged profits on today’s markets. It is estimated that nearly twenty per cent of the UK equity market turnover is based on CFD paper contracts compared to actual transfer of share ownership. When traders open a CFD trade they have the option to either open a long or short position. A long position is when the trader buys into the trade hoping shares to go up. A short position is when the trader sells to enter the trade hoping the shares will fall in price.
The contract value of a CFD is defined as the number of shares the CFD trader has assigned for the trade multiplied by the price of the underlying share from which the value of the CFD value is derived. A trader who has gone long into a trade will profit as the value of the underlying share increases. Conversely a CFD trader who has initiated a short to enter into a trade will profit from the falling price of the underlying share. A long CFD contract gives the trader no rights to acquire the underlying share and no shareholder rights but receives the dividends as well as the capital returns. A short CFD trade gives the CFD trader the profit for the falling shares but there is no contract requirement to deliver the underlying shares at any point.
CFD traders who open a position with their CFD provider aren’t obligated to pay the full underlying value of the contract. This fact lies in the heart of the biggest advantage of using CFDs for trading. The only money that is required to open a trade is the deposit funds also known as the margin or collateral. The margin you put up to open a trade depends on the CFD provider you choose as well as the liquidity of the underlying share. The level of margin is usually given as a percentage. The CFDs are usually ‘marked to market’ daily which means the CFD trader needs to ensure that the level of margin in their account every day matches with any changes in price of the underlying share.
CFD Traders would also pay interest daily on the full value of a long CFD trade since the provider has essentially financed the value of the trade. Conversely on short trades the trader would receive interest. These interest payments will also include a percentage fee for the CFD provider, so in long positions you may add two to three percent on top of the set interest rate and for short positions you would subtract that interest margin from the cash rate of the day.
CFD Trading FAQs
What is a CFD?
A CFD (or Contract For Difference) is a contract that allows traders to speculate on the value of an underlying asset, similar to transactions seen in traditional share trading. Gains or losses are determined by the difference between the asset’s value at the open and close of the contract and then multiplied by the quantity of CFDs bought or sold. Essentially, CFDs provide a vehicle for investors to benefit from potential price movements without taking physical possession of that asset.
How do I begin trading CFDs?
Getting started with CFDs is relatively easy but, whenever a risk is involved, new traders should take the time to research the potential advantages and drawbacks that will inevitably be experienced once real money is committed to the market. This should not be considered discouraging but, as with other forms of speculation, the risks should be understood before opening and funding a CFD account.