Contract for Difference Trading – CFD

Lewis Wolfe — Tue, 17 Feb 2009 14:17:07 +0000

You don’t actually own the stuff you’re buying.
CFDs are a way of trading without buying or selling the underlying financial instrument, whether currency, stock, equity, directly. So, as such, liquidity doesn’t enter into it – in that sense, a purer speculation on price movement up or down.

You’re not actually buying it, either
A CFD (Contract for Difference) is an agreement to exchange the difference between the opening and closing value of a financial contract at its close. You’re placing a trade with a CFD provider, and the CFD price replicates exactly the price moves of the instrument (you hope), as if you did own it.

How do the CFD providers make their money? There’s the spread, and they’re doing a lot of order-matching behind the scenes, while hedging off any discrepancy.

Bid/Ask Spread
As with traditional online retail share dealing and forex, CFD prices are quoted as a bid/offer – (the price you sell at, versus the price you buy at).

Margin/Leverage trading
Yes, there’s margin involved – boosting returns and losses – but not the 1:400 leverage of the standard forex market.

My own view is that CFDs are to be avoided, on stocks, equities, anything and everything – it’s one small step away from spread betting and if you want to end up like those dumbasses who spreadbet on the FTSE opening every morning, fine, go ahead…

One other point – the basic position is that CFD trading in the forex market is not legal if conducted in the USA – different jurisdictions may vary.

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Contract for Difference Trading – CFD