A derivative product, Contract for difference (CFD), allows traders to profit from changes in the price of stocks, shares, commodities and forex trading. A Forex trading Contract for Difference or a Forex trading CFD works as a contract between two entities, in which the seller will agree to pay the difference between the current value of a currency and the value of the currency at a future date to the buyer. And in this transaction, the seller profits from a decline in the value of the currency.
CFDs are generally off-exchange financial instruments and are traded at a fraction of the cost of traditional stock trading. CFD traders do not take delivery of the instrument and settle the difference between the purchase price and sale price, on which the trader either makes a profit or a loss. CFDs are a new and efficient way to trade shares, equity indices, commodities and foreign exchange.
For trading in CFDs, you do not need to pay for the full value of the positing you have picked up, rather you may put up a margin from just 5 per cent of your position, resulting in trades up to 20 times your initial capital. This fantastic leverage has made CFD day trading one of the most popular investment strategies.
Geared financial instruments such as CFDs allow traders to make the most effective use of their investment capital. However, it is important to understand that the amount the trader could lose relative to the initial investment is much greater than in the case of non-geared instruments. CFDs also provide traders with an extremely wide range of products to invest in, who can easily start dealing across a large cross - section of the market.
CFDs bring with them a few unprecedented benefits over conventional trading: -
* Very low margin requirements
* Immediate execution on transparent prices
* Ability to go long and short
* Puts up a fraction of full contract value
* No stamp duties
Forex trading CFDs gives a whole new dimension to financial markets as it builds on the inherent advantages of CFDs. Contracts for Difference were designed to allow traders to rake in the benefits of owning a share / commodity without physically possessing it. A forex trading CFD is advantageous over conventional trading as the price at which a forex trading CFD is purchased is the base price and hence a CFD trader need not worry about the least of the maximum value of the currency pair in question. Rather, the trader is impacted by the fact whether the price of a currency is above or below the contract price.
Also, for forex trading, the trader need not invest in full to purchase the currency. He will usually pay a margin of the real price, and the profits in this type of CFD trading are comparable to other forms of currency trading. Very often, you may witness leverage options as high as 500:1 which results in the trader being able to invest in a very high number of units.
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