|
Looking at the volatility of the stock market it is easy to understand why people are apprehensive about getting involved. One statement from the Fed chairman and stocks go tumbling. Just in conversations with people on the street, most don’t seem to understand how the market works. They believe you need a lot of capital to buy stocks, and then there’s always the risk of picking losing trades. The great thing is, the best way to manage your risk is through training and education and understanding how the market works can make it a very lucrative stream of income for you. There's a whirl of financial instruments and investment strategies out there, and just gaining a grasp on them all will make your head spin. Not only that, they’re difficult to describe but we will do our best in this series to give you some idea of what’s out there so you can be better informed before you take the big plunge into investing. One of these instruments is called a Contract For Difference (CFD). It is a powerful financial instrument that enables you to invest or trade Stocks, Indices, and Commodities with only 5-10% of the actual asset price. When used the right way, it enables you to make 10-20x faster returns compared to direct stock investment or trading. A CFD needs to have 2 parties: a buyer and a seller. The seller has an asset. An opening trade is made on that asset. The buyer of the CFD (assuming he or she is long on the market) will make money if the stock goes up and lose money if the stock goes down. Instead of owning the asset, they are instead trading the amount of change or difference that the stock makes over time, hence the name Contract For Difference. Contracts For Difference are very similar to buying stock options. The buyer of the stock option gets a large amount of leverage and profit based on how much the stock moves in the desired direction. The difference between stock options and CFD’s is that an options contract has time value built into it and it also loses the time value with each passing day until expiration. CFD’s do not have an expiration date. With CFD’s you are essentially buying and selling stocks with a large amount of leverage. You don’t own the stock, yet you still will receive dividend payments. What Else You Need to Know: - CFD’s will usually provide large leverage such as 20 to 1 buying power. This means a trader can use a small amount of capital to take a very large position. - This trading instrument is very easy to understand and is directly tied into the price of the underlying asset. - Lower fees when compared to other stock trading brokerage fees. - Ability to trade both long and short on the market (you can make money whether the market goes up or down). - There is no expiration date when purchasing a CFD. However, there are overnight holding fees. - No need to hold the asset. - The regulations and rules applied to most day traders do not apply equally to CFD traders. There is no need to have 25 thousand dollars held in an account to trade CFD’s. CFD’s are most suitable for day traders that want a highly leveraged variety of stocks and assets. The lower transaction fees and no expiration date make for these a very good alternative to stock options or discount brokerages. The downside is since CFD’s can employ a high degree of leverage, investors can lose money quickly should the price of the stock move in the undesired direction and high leverage magnifies losses when they do occur. CFD’s provide an excellent alternative for certain types of trades or traders, such as short- and long-term investors, but you must weigh the costs and benefits and proceed according to what works best within your trading plan.
Related Articles -
richard tan success resources, stock market, contract for difference,
| 
