CFD Trading enables you to hold a position in the market without actually owning the asset. CFD stands for Contract for Difference. It is a financial derivative that allows you to take positions depending on your expectations of market movements. You go long (or buy CFDs) if you believe the markets are going to go up and you go short (or sell CFDs) if you believe markets are headed south.

CFDs can be traded in equities, indices, currencies and commodities. The parties that trade in CFDs include day traders and hedge funds.

Why CFDs?

The main pull of trading in CFDs is that they offer you a very attractive leverage. The ratio can be 10:1 or 20:1 even. So, with a very small initial capital you can take large positions. If you have a strong belief that markets will rise but don't have the wherewithal to put your money where your heart is, CFDs are an ideal tool.

Things To Know About Cfds:

• Like shares, CFDs have no expiry date.

• You have to maintain an initial and variation margin before you start trading.

• They allow you to trade on a wide variety of assets and access different markets. So it is important to be well-versed in world markets and regional tax laws. You can access markets in Singapore, Australia, New Zealand and a host of European nations as well with CFDs.

• The same rule that applies to all asset classes, applies here too. Benefit from knowledge of the different factors that play on the prices of CFDs like political, economic, social and legal changes.

• CFD trading is especially useful when you want to make some quick profits over a short period of time.

• As a buyer of CFDs, you are entitled to receive dividends on the underlying equity but as a seller you are liable to pay them to the buyer.

• There is no stamp duty on CFD trading but you will be charged commission on your contract size as well as finance charges based on the existing London Inter bank Offer Rate (LIBOR) depending on the type and period of trade.

Differences Between Futures And Options And Cfds:

Futures and options are standardized exchange-traded products with much larger contract sizes. CFDs are over-the-counter exchange products that come in smaller sizes and hence can be traded by small-time traders.

Risks Involved:

• The additional leverage gained, comes with the downside that you could lose a lot more than just what you invested. So it is advisable to adequately diversify yourself by splitting your investment across various asset classes.

• The value of a CFD contract is as good as the parties that have entered the contract. So, you are exposed to the possibility of counterparty risk.

• If markets move against your expectations the variation margin will have to keep being replenished so stop loss and limit orders come in very handy to restrict the amount of your losses.