CFD – Contract for difference. The tool that is widely used in European and American risks. It is used as hedging (insurance) of the risks.
The buyer and the seller sign sales contract of the basic asset, but as a fact there is no supply of goods. After the terms of contract expiration, one of the parties pays the price difference. CFD broker is an intermediator in this deal.
Example: The buyer and the seller sign a contract for buying of 10 barrels of petroleum in a month, which costs 35 USD at the time the contract is signed. If the price increases to 37 USD/barrel, then the seller pays the difference of 2 USD/barrel. And vice-versa if the price decreases, the difference pays the buyer.
Investlb.com financial service provides the list of CFD broker on its pages, which are ready to provide the ability of trading using even such specific tool. Their conditions are loyal, and the reliability is proved by appropriate licenses of the regulators.
| № | Broker | Reviews | Minimum deposit | Minimum rate | Leverage / Profitability | Mobile application | Regulator | Link |
|---|---|---|---|---|---|---|---|---|
| 1 | Broker Grand Capital Founded in 2006 | 10 USD | 1 USD | 444% | Вануату | View more Go to site | ||
| 2 | Broker Forex Club Founded in 1997 | 10 USD | 10 USD - 0,01 lot | 1:100, 1:200 | ЦРФИН | View more Go to site | ||
| 3 | Broker AMarkets Founded in 2007 | Absent | 0.01 lot | 1:3000 | КРОУФР | View more Go to site |
CFD brokers: peculiarities of the trade using this tool and hedging principle.
First that is worth paying attention of the trader, who is going to invest money in the following tool – is a credit leverage. The biggest it is the more profit could be received in a short-time period with the fixed level of the deposit. The second – is the ability of risks hedging which is described more detailed in the following example:
Imagine, that you buy securities (stocks for example) in quantity of 1000 pieces of the definite company, which, for example, is a mediator in the mortgage market. Because of the problems in the mortgage market (remember 2008 in the USA) you have a doubt whether those problems are temporary or not. What you have at that moment:
- 1000 stocks bought for $5,82 /piece;
- Current stock price of $7,3 /piece;
- Doubt whether the mortgage marker collapses or not in a short-time.
You may suppose, that due to temporary problems the price of the stocks will lower down, but as time passes the price will return back to maximum level. Which will be the market dynamics you don’t know, and you don’t wish to close now the profitable position either. The solution of this problem is hedging. You sell the same number of stocks for the difference with current market price (important moment: CFD include the actual selling of the asset!).
CFD broker offers the credit leverage, which will allow to add the deposit of only 10% of the stock price for selling of your 1000 stocks, that will b. There are 3 possible scenarios:
- the stock price is growing;
- the stock price fall;
- the stock price is stable.
- The stock price grows.
When the stock price grows, you get the profit from investments, but suffer losses by CFD contract (because the seller pays out the difference to a buyer). That’s why in this situation, immediately redeem your CFD-contract, that was sold to a buyer earlier.
- The stock price falls.
In this case, you suffer losses from the investments, but the CFD-contract will cover those losses. As soon as you realize that the price growth will return back, the CFD contract should be redeemed and the hedging positions should be closed.
- The stock price is stable.
You get neither profit, nor suffer losses when investing as well as when hedging of the risks with CFD-contract.
The advantages of the following toll for traders:
- deals insurance on the stock market with minimum expenses, due to credit leverage, provided by a broker.
- Lower commissions (specify this with the trader) comparing with the classic trade on Forex;
- Diversity of the risks: ability of securing the deals with any financial tools;
- CFD broker provides the direct access for the investor to the international markets, access to which is limited to other private persons by confirming of the qualification;
- The credit leverage of CFD broker allows the investor to access highly liquid stock markets, where the securities prices may exceed at times the investors deposit;
- The ability of using the strategies, similar to Forex trading.
Peculiarities of CFD-contracts trading:
- Trading of CFD for stocks is tied to a stock-exchange sessions, during which the quotes could change (unlike the Forex, which works round the clock);
- Earnings of the investor is based not on price quotes of the assets change, but on the mobility of the value of the asset itself.
Investlb.com – invest wisely in the best tools of stock markets!