More and more investors are trading CFDs – Contracts for Difference. A CFD is an investment instrument that allows investors to participate in the price movement of securities or indices without full ownership of the underlying stock or index.
CFD trading offers a variety of advantages that traditional stock trading does not allow including the possibility of utilising leveraging and “short selling”. But as with all financial investments, an investor must first and foremost pay attention to the underlying product that is being traded, work out a risk profile, but moreover, have an overall investment strategy.
The choice for short term stock traders
CFDs are rapidly increasing in popularity and becoming the instrument of choice for short term stock market traders.
Share CFDs are offered under a number of margin groups with margin requirements that depend on the Market Capitalization, liquidity and volatility of the stock.
Index CFDs are over-the-counter products where the price is established by the underlying market. Index-tracking CFDs, enable you to spread investment risks across an entire stock index instead of being based off a single stock.
Direct Market Access CFDs offer all the advantages of CFDs but on live underlying stock exchange prices. Allowing direct participation in the exchange order book, with Direct Market Access CFDs allow you to place orders directly at the current market price.
Not a different risk profile to Stocks
Trading CFDs involves the same risks as trading stocks. However, with CFDs, the degree of risk involved depends on the leveraging an investor chooses to employ. Nevertheless, an investor does not have to leverage when trading CFDs and the level of leverage an investor chooses should always be in sync with their risk profile.
CFDs can be sold short
To “short sell” means that you can, for example, sell a specific amount of CFDs and then buy them back at a later point in time. CFDs are also instruments that an investor can use to hedge purchased shares (protecting longer term investments from the temporary downward movements of the stock market) or if he thinks a particular stock will decrease in value. There are two relatively straight-forward but very valuable possibilities for investors with an interest and insight into a particular stock. The ability to “short sell” is a common investment strategy and is possible on a variety of other active asset classes such as bonds, Futures, Forex and stocks (via options and futures) and has been used by active investors for many years.
Both long and short CFD positions can be opened and closed immediately at the live tradable price quoted. Buying and selling CFDs is quicker and more convenient than trading physical stocks as CFD positions are settled in real time.
Growth of the CFD market
Larger stock markets, like Great Britain and Australia, have experienced significant growth in CFD trading in recent years, and today, CFD trading in Great Britain makes up almost 40% of the country’s total stock turnover. In Australia, CFD trading has generated so much interest, that ASX is introducing five international CFD stock indices and additional CFDs on selected commodities and Forex.
The volume of CFD trading has grown exponentially in the past three years, at an estimated 800 percent worldwide.
CFDs are a powerful alternative to stock trading although they are not profoundly different from stock trading. This is what makes CFD trading so popular. Numerous professional traders in Australia and around the region have ventured into the proprietary business of offering courses on trading CFDs which are increasing the level of awareness. Similarly, traders looking to gain an understanding of CFDs could turn to online trade facilitators which combine their introductory courses with hands-on training on their platform for a holistic experience and appreciation for this investment instrument.
All in all, CFDs are a very powerful alternative to stock trading.