subject: The Secret To CFD Trading Success [print this page] CFD trading or Contracts For Difference trading relates to the stock market trading, where once a derivative stock is traded, profits can be made due to the changing prices of shares. In the world of finance, a contracts for difference is noted as a contract between two people/parties, normally denoted as a "buyer" and "seller". This contract stipulates that the seller would have to pay to the buyer the difference between the present value of the asset and the value at the time of the contract. The opposite happens in case the difference is negative. The payout is the difference, hence the contracts for difference!!
Let us take an example to understand this better. Say one has a thousand shares of x company which have been bought as CFDs. Each share's cost is $10.00 and the price changes to $10.50 during the trading session. This change in the price is the profit per share i.e. it is a $500.00 profit on the entire CFD trading. The benefit of this practice is that one can short sell CFDs and still be able to make a profit out of it due to falling of the market!
The best part is that there is no need for a transfer of ownership of the shares.
CFD Trading Semantics
CFDs are traded between individuals and a CFD provider. Each provider can specify their own set of terms of the contract.
The CFD is started by opening a trade on a particular CFD instrument. This starts a 'position' in that particular instrument. There is usually no expiry date on the instrument and the so called position closes when a reverse trade is done.
It is at this point that the difference of the opening and closing trade is measured and the payout is either a profit or a loss. The provider also adds a few operational charges such as commission and other administrative fees as a part of this trading.
After the profit or loss and charges have been realized and the payout has been made to the client's account, the position is made to carry forward or 'rolled over' to the following day.
Contracts for difference are normally traded on a given margin, and the CFD trading must happen with that at all time. In trading the profit/loss and the margins are calculated in real time and displayed to the person trading online. Just in case the payout drops below the minimum margin, a margin call is placed. The traders must immediately cover these margins fast else the provider may start to liquidate the open "positions".
Currency Markets
A foreign exchange market i.e. Forex or FX market is a derivative of the CFD trading business worldwide. FX trading provides a decentralized type over-the-counter market for trading of world currencies. There are financial centers across the world, which function as trading anchors different buyers and sellers all through the day 24x7, except the weekends. The foreign exchange market determines the relative values of different currencies.
The Secret To CFD Trading Success
By: Commons Yale
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