What are CFDs?
CFD stands for Contracts for Difference. It is simply margined trading. When the position is closed you pay or receive the profit or loss made on the trade.
A CFD gives you all the benefits of the underlying cash equity whilst avoiding many of the typical costs associated with dealing in the physical share. CFD trading allows you to gain cost-effective, flexible and geared exposure to world shares and indices.
A CFD is an over-the-counter (OTC) derivative product and as such is not regulated on any exchange. OTC trading is performed directly between the seller and the buyer. As it is a margined product you only have to put up a fraction of the actual value of the trade you wish to do. We have introduced CFDs on indices and Equities as well as FX onto the Meta Trader platform. These can be seen on the demo site and it is advised that you practice trading them first if you are not familiar with the product.
Who trades in CFDs and why?
People trade in CFDs for a variety of reasons
- Some trade to speculate with a view to profiting from fluctuations in the price or value of the underlying instrument or security. For example, share CFD traders may be short-term investors who are looking to profit from intra-day and overnight market movements in the underlying shares.
- CFD traders may not wish to sell or purchase the underlying shares themselves, but may instead be looking to profit* from market movements in the shares concerned.
- Others trade CFDs to hedge their exposures to the underlying instrument or security. For example, CFDs can be used as a risk management tool to enable those with existing holdings of underlying shares to lock in an effective sale price for the shares concerned by taking a "short" CFD position. If the price of the underlying shares the investor holds falls, the short CFD positions will wholly or partly offset the losses incurred on the physical holdings.
CFDs also allow people to trade on a leveraged basis. You are
able to outlay a relatively small amount (in the form of Initial
Margin) to secure an exposure to the underlying security.