The Advantages of Online CFD Trading

Of all the financial instruments available to traders today, among the newest, increasingly popular and most powerful are Contracts for Difference (CFDs). Though introduced to retail traders in the late 1990s, CFDs are still largely unknown to the broad trading community. Through an evolutionary refinement,  CFD activity since 2013 has been defined as between individual traders and CFD providers. There are no standard contract terms for CFDs, and each online CFD provider can specify their own, but they tend to have a number of common characteristics.

What is CFD trading?

  • The CFD begins with initiating an opening trade on a particular instrument with the CFD provider. This creates a ‘position' in that instrument. This position has no reverse or closing date. When the position is reversed, the difference between the opening and closing trade prices is paid as profit or subtracted as loss. Additional charges may be levied by the CFD provider for position initiation or maintenance, like a bid-offer spread, overnight financing or account management fees. CFD trades are usually executed with NO COMMISSION. Platforms generate their revenues principally from the bid-ask spread, which can be as little as a few pips (with a single pip generally at 0.0001 in currency spreads)
  • While CFDs do not "expire", positions left open overnight are considered to be 'rolling', or ‘marked to market'. This usually means that any gains or losses are realised and credited to or debited from the client account and any financing charges are calculated on a daily basis and then rolled forward to the next day. By tradition, the daily reckoning process occurs at 10pm UK time.
  • CFDs are highly leveraged, and the buyer or seller is obligated to ensure that a sufficient margin for the trade is always present. With real-time monitoring the norm, margin calls are instantaneous and platform margin calls (position liquidation) is immediate.

While conceptually simple, the evolution of the CFD market indicated progress in a variety of infrastructure technologies to become commercially viable. The ability to create a proprietary platform sufficiently efficient to represent all market participants required sophisticated software processing for back-end server, mobile and cloud technologies. Only with all these elements in place, could a sufficiently robust eco-system be built.

Several Important Advantages Of Online CFD Trading

Leverage is the means whereby your CFD margin deposit controls an asset of multiple times greater value, offering a magnified trading impact and accelerated return. Leverage is particularly expanded in CFD forex currency trading because the transaction is totally about cash and requires no agency or third party trade clearing. Thus a leverage multiple of 400:1 is common. Small trading portfolios can thus gain significant diversification at no loss to efficiency. Thus, while leverage is a technique that can be used to multiply gains (or losses), it is better thought of as a tool for the small trader to achieve portfolio diversification.

Note that margin requirements usually increase proportionately to the value of the underlying trade asset.

Another significant advantage of online CFD trading is the single interface to all markets available using CFD trading platforms.  Thus if an instrument is transacted on an active recognized market anywhere globally, participants can use their online CFD accounts for trading online.

Trading CFDs involves significant risk of loss. Trading FX/CFDs involves a significant level of risk and you may lose all of your invested capital. Please ensure that you understand the risks involved.