A contract for difference recently, is offered more often by the brokers recently.. A few years ago this tool was exotic, but today it can be found almost at every third broker. However, novice traders yet doubt to try CFD trading, in order to adapt it to the specifics. Meanwhile, the CFD trading is very interesting and has a few differences from the classic futures trading or directly from assets.
Contract for difference: advantages and piculiarities
Contract for difference — is a contract obetween two people, which provides the compensation for the difference in value of the asset at the end of it. Example: two people enter into CFD contract with the underlying asset “the stock” at its current cost of $ 10. When using a fixed time asset changed in value, one party pays the other the difference. The tool works perfectly in volatile markets, where each is confident of the correctness with respect to the direction of movement of quotations. It is logical that with prolonged increase or decrease it is difficult to find someone who will think against the market.
The first contracts for difference appeared in 1980-s. There was the only difference in the stock price. Today, CFDs are almost all types of instruments, ranging from assets of commodity markets, ending with bitcoin.
The main difference between CFD trading from other trading instruments is in the fact that supply of goods does not occur. And this is their most important advantage. If the futures at the end of the term must be fulfilled, that is, extinguished the actual product, CFD is a tool that allows you to bet on a growth or decline in the value of the underlying asset. In the case of futures there is a bubble and artificially inflated prices of the asset, whereas CFD trading takes place in the framework of cash. In case of excess of the trader’s losses due to price fluctuations, the contract for difference can also be closed prematurely.
Advantages of CFD trading:
- ability of getting profit in any market trend (before the short CFD positions would be open only to professionals, shrewdly versed in the market);
- the Deposit transaction is 5-10% of the transaction amount (relatively low margin);
- small spreads.
Pay attention to the property of CFD as a “amendment to the dividend”. As the owner of the CFD contract on preferred shares is not their owner, the trader cannot get dividends. Adjustment for dividends is credited to the account of money in the event of an open position on purchase, cancellation and in case of sell position. By the way, the point that a trader with a short position will have to pay their money, is often gently hushed by brokers.
Disadvantages of CFD trading:
- since the actual delivery of goods does not occur and the right of ownership of the asset does not arise, trade contract for differences is speculative. Besides, money won’t do good for the economy, because money just flow from one trader to another;
- deposit amount for a profitable trade needs to be at least 2-3 thousand dollars, with a small deposit the probability of loss increases significantly;
- everyone wants to cash in on speculation, but not all are successful. To work with this tool on a predictable market is very difficult.
To sum up. A contract for difference is a relatively new speculative tool more applicable to American and European market than to the Russian. The tool is more complex than binary options or classic trade of currencies because it cannot completely replace the futures or currency pairs trade. However, as a further alternative, can bring moderate income. This tool is only recommended for traders with trading experience above average.