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Online Contracts for Difference or CFD trading allows you to make profits due to changes in the prices of underlying financial instruments without actually owning them. This relatively new type of trading is gaining popularity because of the many advantages it provides.
The most profound advantage of online CFD Trading is that because you are only trading the difference between the purchase and sale (or sale and purchase) prices of an asset, you incur none of the brokerage fees associated with such a transaction – no "round-trip" commissions; only the margin spreads. The market trader enters into a contract with a CFD at a specific price, and the difference between that price and the price that it is closed at is settled in cash. (Note: A small fee is associated with holding positions over 24 hours, so CFDs are not appropriate for all longer-term investment strategies)
Below we list some of the significant advantages of CFD trading
1. Leverage plus margin
Leverage is the mechanism whereby your CFD margin deposit controls an asset of many times greater value, offering a magnified trading impact and accelerated return. The most significant advantage of online CFD trading is the unrivalled margin available in today's platforms, with leverage of up to 400 to 1 (in forex).
Thus, a very small principal can control a significant trading amount, magnifying gains (and losses!). The implications of your decisions take on exponential importance. With this magnification ability comes a responsibility for better preparation and more professional execution. With this leverage ability across the entire range of asset classes, you can benefit from trading the entire set of asset classes with minimum committed capital.
CFD trading is a truly global enterprise. Trade initiation is possible if an official exchange is open for business somewhere on the globe. With forex, major commodities, and stock indices trading nearly 22–24/5, so are CFDs. And for commodities and shares listed only on US or European markets, trading hours are no less than in the underlying exchange. Fixed margins and best execution policies minimize unexpected "spikes", even in fast moving markets. With CFDs, what-you-see is almost always what-you-get.
3. Tax and cost efficiency
Again, because CFDs are only agreements to compensate for price movements and not transactions involving asset ownership, their cost efficiency and style of taxation are also more advantageous. Levies associated with specific asset classes, like stamp taxes on shares are not imposed. The general exemption because no physical asset changes ownership can beneficially affect the relative tax and regulatory burdens as well.
As discussed above, the absence of a commission means that transaction costs are minimized. Furthermore, fixed costs are largely eliminated.
Similarly, the expensive costs and delays of a physical delivery of the shares, the registration, and any holding/safe custody charges that come with having a broker are eliminated, which saves you time and money.
4. Facility of automated orders and alerts
Today's advanced CFD trading platforms offer a uniform interface for trading in all underlying assets. Additionally sophisticated alarms and trade prompts and executions ease your formulation and execution of standing orders to minimize losses and maximize profits.
5. Convenience of placing orders
A very important benefit of online CFD trading is that you can place your orders on multiple platforms and environments with one interface. Industry-leading companies offer 24/5 assistance and advance mobile-friendly environments. Seamlessly monitor your portfolio on smartphones, tablets and desktop PCs, depending on where you are. Trade anytime, anywhere.
6. Breadth of Offerings
In addition to the seamlessness of the interface and the general absence of commissions, the ability to trade a thousand or more financial instruments enhances the functionality of online CFD trading to the extent that they represent an optimal platform for a variety of hedging and risk management positions. For both traders with positions in any number of marketplaces and businessmen with exposure to underlying asset price fluctuation, having a single user-friendly multi-platform interface with position details reduces risk and overhead.
Now you can see the benefits of online CFD trading and why this type of trading is enjoying increasing popularity, particularly among those with modest funds available for trading.
While CFDs were initially publicly traded negotiable instruments on stock exchanges, their business model rapidly evolved and migrated into proprietary platforms wherein and whereby volume grew exponentially. Integral to this evolution was the explosion in computing power and the internet such that each current CFD marketplace is a closed platform backed by private capital. While national and supra-national financial regulators impose a veneer of respectability and oversight to the various operations, the business license threshold is minimal. Traders are thus required to perform their own due diligence in platform evaluation.
Evaluatory criteria include those both specific to CFDs and those more general related to trading environments. Apart from registration and any infraction information available from the regulatory authorities, enquire as to
CFD trading is a form of derivative trading. The price of the underlying CFD is derived from the price of the
asset/s in question. With CFD trading, any number of financial instruments can be traded including stocks,
commodities, indices, forex, currency pairs, bonds, ETFs, et al. Traders do not actually buy or sell the actual
financial instruments, it’s merely a CFD contract that is traded. Therefore, traders do not own any of the assets
being traded; it’s merely speculative activity on the price movements of the assets in question. How CFD platforms
are used depends on what leverage, margin, hedging, short or long trading activity is performed.
It is possible to trade CFDs in rising or falling markets, and profit accordingly. Unlike traditional trading, where profits are generated from asset appreciation, CFD trading platforms allow traders to benefit from correctly forecasting price movements of the underlying assets. CFD trading is a high-risk activity and the majority of traders lose money trading CFDs. It is important to select a reputable online CFD broker to conduct all of your trading activity. These providers offer comprehensive educational tools and resources for trading CFDs online, including demo accounts for practicing CFD strategies under real-market conditions,