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For those who haven’t come across the term yet and do not know what is CFD trading, CFD stands for Contract For Difference and it is an agreement that two parties involved in financial contracting come to, as to exchange the difference between the opening price of a contract and the closing price. The value of this type of contracts derives from the actual performance of the asset that lies at the basis of the contract, which is why they are considered to be derivatives. Many traders use these contracts as leverage, as they allow for maximised market exposure, while keeping costs low or at least much lower than owning and trading the asset directly. As in much any type of trading, CFD trading enables investors to take two different stands: long positions for when the asset is believed to increase in value and short positions for when the asset is believed to fall in price. CFDs can be offered for virtually any type of trading assets, from currencies and commodities to shares, indices and others. Although CFD has been introduced in London at the beginning of the 1990s, the trading option is considered to be relatively new and not all investors are aware of its benefits or even its key features. CFDs only require a small investment for large exposure to financial markets, reason for which they quickly became very popular among hedge funds traders, but also among institutional traders. When the Internet made its way onto the trading market and gain more and more and more ground, the use of CFDs registered a significant growth, due to the online retail traders. At that point, the question was no longer what is CFD trading, but rather what it can do. Well, at the very core of the concept lies its possibility to provide a much higher leverage than any other traditional trading vehicles. Their rates vary, as do with every trading instrument, but industry standards set their margin requirements as low as 2%. For instance, an investor can choose to go long or short £1000 on the shares of any given asset with a puny deposit of £10. Due to the fact that CFDs have so low requirements for initial deposits, they make a very attractive option to individual traders. In addition, they also present the benefit of investors being able to make money whether prices rise or fall, as long as they adopt the right position. Not only that, but CFDs can also be tax efficient, as whatever loses you may experience while trading them might help you reduce you capital gains tax, although this is highly dependable on each trader’s individual tax situation. The bottom line is that if you never knew what is CFD trading, then the concept is definitely worth exploring, as it provides traders with flexibility, lower risks and small initial investments, as well as a large variety of trading options. However, it is important for traders who are new to this option to research the market well and learn the ins and outs of CFDs, as well as the various strategies available. To learn what is CFD trading or to find out more about CFD trading, please follow the links.
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