CFD that stands for "Contract for Difference" is a standardized contract between two parties (buyer and seller) to exchange the difference between current market price and closing market price of a contract through a recognized CFD broker without owning underlying asset. The asset in the contract can be equities, indices, currencies or commodities. Contract for Difference means, the buyer or a seller is trading an asset based on the difference in buy and sell price rather than buying or selling underlying contracts as happening in futures market. This is the finest attraction of CFDs that makes it a highly leverage instrument across the financial world invented so far.
CFDs are provided on various underlyings across the world by which traders can have instant access to different market types – Indices, Equity, Forex, Commodity – from a single trade platform.
CFDs with its underlying as Indices such as Dow, S&P500, FTSE100, DAX etc. for trading and is suited for traders for hedging against overall market. CFD Indices works 24 hours a day, hence advanced traders and institutional investors can make use proper fund allocation in terms of hedging their portfolios.
CFDs with its underlying as stocks or equities to trade on a margin basis in which you do not have to pay for the full value of the shares. Buyer will be entitled to receive interest and dividends same like that in equity shares if your position remains open. On the short side, adjustments will be in same as that in normal equity trade. Equity CFDs have no settlement period and you can hold your position either long or short, provided there is enough margin in your account. But you should be also aware that high risk accompanies with CFDs if price moves in a direction against your position.
Currency CFDs operates 24x5 manner across the globe with negligible margin for trade when compared to normal Forex market. At Kerford using an initial deposit of 1000 USD, you can trade in major single and cross-currency Forex pairs with competitive spreads. To find more on CFD trading in forex, please click here.
CFD trading in commodities gives access to trade in world’s largest futures market at extreme low margins when compared to normal commodity futures market. CFD Commodities are financially settled despite physically settled in normal market. Commodity CFDs are extremely beneficial to all class of investors for their low entry cost resulting in high liquidity and sharp price movements.
Why Contracts for Difference (CFDs)?
CFD – Major Players
Risks in CFD Trading
Since CFD is a highly leveraged product, it can be like a double edged sword that you can lose more money than your initial deposited margin. So utmost care should be taken while trading with CFDs.
There are two types of CFD Models – Direct Market Access & Market Maker
• Direct Market Access (DMA) Model
This model gives buyers and sellers the exact market prices with complete transparency and can determine exact entry and exit levels as per the market. DMA provides competitive price, quick transactions and low level of manipulation due to direct There is no other middleman adjusting prices of the market- trades taking place directly between you and open market. Liquidity of assets in DMA model is perfectly based on the market and speed of transaction will be very fast with no time delay. Players in DMA model can make prices of asset to move up or down as they have direct market access with the opposite trader.
• Market Maker Model
In this model, you can trade through a middle man or Market maker by which prices will be mirroring closely to market values. In otherwords, a synthetic market is been created by Market maker model.This model has a major advantage that it provides better market liquidity than the DMA model. Players using this Market maker model offers its clients wide array of international investments including, Forex, CFDs and Metals& Energy Futures.
Common CFD Trading Strategies