CFD is an acronym for Contract for Difference. It offers European investors and traders a unique opportunity to make a profit for every price movement in the market without being the owner of the particular being traded. This is very simple security and it is calculated by the movement of assets between trade exit and entry. It involves the computation of the change in price without giving any consideration to the value of the underlying asset. It is accomplished via a contract between the broker and the client; it also does not depend on any other exchange, be it futures, commodity, Forex, or stock. The advantages of CFD Trading are many and these have helped to increase the enormous popularity of the instruments in the past decade.
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How it works CFD trading
If the ask price of a particular stock is $25.26, for example, and the trader decides to buy up to 100 shares, the transaction cost will be $2,526 together with the fees and commission. The trade needs minimum free cash of $1,263 in a 50% margin account at a traditional broker. A CFD broker will initially need just $126.30 or a 5% margin. A CFD trader will record a loss that has the same size as the spread at the particular moment that the transaction takes place. If the spread recorded if 5 cents, for example, there is a need for the stock to gain 5 cents if the position is to reach the breakeven price. If the stock out-rightly belongs to you, you will record a 5-cent gain in value. However, you would have incurred a huge capital outlay and also paid a commission.
CFD trading Advantages in South Africa
CFD gives higher leverage than any other form of traditional trading. In CFD Trading, standard leverage is subject to regulation and was once as low as just a 2% margin (50:1 leverage). However, this is limited to 3% range, which is synonymous with 2:1 leverage. When the margin is lower, there is a need for a less capital outlay. Bear in mind also that higher leverage can equally increase losses.
Many of the CFD brokers around provide products in virtually every major market in the world, which allows 24/7 access. There is equally no borrowing stock or shorting rules in CFD Trading. Some markets come with certain rules that prevent shorting. Such markets require that the trader borrow the particular instrument used before he sells short. Or possess a different requirement of margin for both long and short positions. It is possible to shorten CFD instruments any time without ever borrowing costs since the underlying asset does not belong to the trader.
Furthermore, CFD Trading never requires day trading unlike some markets that require you to place particular limits on the amount of money or a particular capital as a minimum for day trading. There is no such restriction at all in CFD Trading. You can open a CFD Trading account for a very small amount of money, as little as $1000. Be that as it may, many traders use a minimum of $2000 or $5000 as minimum deposits.
CFD trading provides the trader with a variety of trading opportunities. CFD brokers are currently offering commodity, sector, currency, treasury, index and stock. As a result, speculators in different financial markets can easily trade CFD and use it as an alternative to exchanges.
CFD trading disadvantages in SA
CFD Trading has so many advantages and equally has certain disadvantages that you need to always bear in mind. For one, regulation in the industry is somewhat weak. You should, therefore, properly investigate the background of a broker before you open an account with that particular broker. The risks are equally high. It requires very close monitoring consequent of its fast-moving nature.