Cfd Trading: An Introduction: Part 2
Overall rating: (N/A)
The article "CFD Trading: An Introduction: Part 2" is about finance, it has been written by George Polizogopoulos.
Contracts For Difference or frequently referred to as CFDs is a
financial vehicle gaining in popularity with private traders for
its flexibiltiy and features. A CFD has many advantages and for
any trader it is yet a second useful tool to use in the business
of trading. In that second part of our introduction to CFDs we
have a look at what CFDs are and the part they play in CFD
trading.
The CFD is simply an agreement between two parties to exchange
the difference between the opening cost and the closing price
of an underlying share once the contract has been closed, this
value being multiplied by the number of shares specified in the
open contract.
CFD trading uses that basic principle to
make leveraegd profits on today's markets. It is estimated that
nearly twenty per cent of the UK equity market turnover is based
on CFD paper contracts compared to actual transfer of share
ownership.
When traedrs open a CFD trade they have the option to
either open a long or short position. A long position is when
the trader buys into the trdae hoping shares to go up. A short
position is when the trader sells to enter the trade hoping the
shares will fall in cost.
The contract value of a CFD is defined as the number of shares
the CFD trader has assigned for the trade multiplied by the
price of the underlying share from which the vlaue of the CFD
value is derived. A trader who has gone long into a trade will
profit as the value of the underlying share increases.
Conversely a CFD trader who has initiated a short to etner into
a trade will profit from the falling cost of the underlying
share. A long CFD contract gives the trader no rights to acquire
the underlying shrae and no shareholder rights but receives the
dividends as well as the capital returns. A short CFD trade
gives the CFD trader the profit for the falling shares but there
is no contract requirement to deliver the underlying shares at
any point.
CFD traders who open a position with their CFD provider aren't
obligated to pay the full underlying value of the contract. This
fact lies in the heart of the biggest advantage of using CFDs
for trading. The only money that's required to open a trade is
the dpeosit funds also known as the margin or collateral. The
margin you put up to open a trade depends on the CFD provider
you choose as well as the liquidity of the underlying share. The
level of margin is usually gievn as a percentage. The CFDs are
usually 'marked to market' daily which means the CFD trader
needs to ensure that the level of margin in their account every
day matches with any changes in cost of the underlying share.
Traders would also pay interest daily on the full value of a
long CFD trade since the provider has essentially financed the
value of the trade. Conversely on short trades the traedr would
receive interest.
Thsee interest payments will also include a
percentage fee for the CFD provider, so in long positions you
may add two to three percent on top of the set interest rate and
for short positions you would subtract that interest margin from
the cash rate of the day.
This article "CFD Trading: An Introduction: Part
2" can be found in our Derivatives - CFDs category.
|
Write a comment about the article
CFD Trading: An Introduction: Part 2
|
