Define CFD Trading

Submitted by Share Trading on 11 February, 2010 - 13:03

Read about the definition CFD Trading

The definition of CFD trading is: CFD stands for Contracts For Difference. A CFD is an agreement to exchange the difference between the entry and exit price of the contract. Usually there is no expiry date, or no limit to the value of the exchange and no restriction is you are buying first or selling first. However, these conditions change for each CFD provider and look into your terms and conditions.

The flipside to these advantages of CFDs are: there is no expiry date, but the catch is that you will be paying interest on the value of your contract. There are no restrictions on size but the catch is that you need the correct amount of margin in your account. Also another catch is that it is up to the CFD provider (especially if they are a marketmaker) whether or not they will fill the order.

There is also the advantage of margin. When buying stocks, if you want to purchase $10,000 worth – you need 100% of the cash. If you don’t want to own the stocks and only want exposure to the value of the profit or loss, then CFDs can offer you the opportunity to trade on margin. If the stock is blue chip, CFD providers usually offer 3% as margin, and the margin requirement is only $300 giving you full access to the value movement of the stock. This easy access to leverage enables traders to amplify their returns for better (or worse).