CFD Contracts

CFDs / CFD Market

CFDs (Contract for difference or CFD) is an agreement concluded for the difference between opening price and closing price of the position under a contract for various financial instruments. The most liquid market now, FOREX, also may be classified as CFD market. While purchase of a EUR/USD contract at the currency market means conversion of the European currency into dollars, purchase of Intel stocks at the market of CFD contracts means conversion of dollars into Intel stocks. Hence, CFD contracts represent an alternative to trading of stocks, stock indices, futures and other financial instruments. 

Currently, more and more brokerage companies offer their clients with small and medium capital to trade stocks and commodity futures in the form of CFD contracts. CFD contracts may be concluded for almost all liquid financial instruments: futures or spot contracts for oil, gas, lumber (timber) or precious metals.

CFD contracts as well as every other instrument have their advantages and weak points.  The main feature of CFDs is that during trading of CFD contracts no actual delivery of the contracted instrument takes place. The client buys stocks or futures and then sells them, deriving speculative profit from price change. It is convenient, because at any moment the client can conclude a contract in full for offered financial instruments, which is difficult sometimes while trading 'real' stock contracts. A disadvantage of CFD contracts is that the client may not pretend to profit sharing of the company, whose stocks he has bought, and he is actually not a stockholder of this company. By purchasing a CFD contract, the trader can earn only on change in cost of this asset and is not included in the register of stockholders.

Now CFD contracts are becoming more and more popular in the world trading practice, since they allow both to derive speculative profit and to hedge the investment portfolio, if it is unprofitable. Such situation takes place, when the investor bears losses from stocks of some companies, but does not want to sell them. In this case, he has an excellent opportunity to hedge his risks. The investor concludes a CFD contract for the same stocks, but in the opposite direction, thereby saving himself from further losses. Then his investment portfolio remains unchanged.

Besides that, trading of CFD contracts, as a rule, is not associated with conclusion of a depositary service agreement. This allows considerable reduction of service costs of the trading account and simplification of trading procedures. Most of brokerage companies offer an opportunity to trade from one account for CFD contracts, FOREX and other financial instruments.

CFD is a marginal product, i.e. all transactions under these contracts are carried out according to the same scheme as with currency at FOREX market, with provision of the Leverage.

Main advantages of CFD are:

• Possibility to conclude CFD contracts for sale at any moment (Short trades):

CFD allow selling financial assets as easily as buying them, which previously was accessible only for professional investors. With cfd, trading stocks, indices, futures contracts and other financial assets becomes more efficient in terms of costs and from the point of view of execution - it is simpler than borrowing of stocks.

• Low commission and margin requirements for cfd:

Commission for trading CFD contracts is much lower than for trading regular stocks, indices or futures. This is connected with the fact, that trading CFD contracts does not imply direct delivery of goods, keeping the register of stockholders, charging of stamp duty, etc. Margin requirements are usually 5-10% of the contract value. It is less than at FOREX, but more than during traditional stock trading.

• Hedging with cfd contracts:

If you have a block of stocks, which you do not want to sell even anticipating price drop, you can just sell a CFD contract for this stock (or a portfolio). Then, losses suffered from the base assets will be compensated with profits from the existing CFD.

• Fast cfd trading:

Speed of CFD trading is as high as at the most liquid market, Forex, i.e. immediately upon price receipt. 

• Conclusion:

It is safe to say that trading CFD contracts is perfect for those, who want to derive profit from price change, i.e. for speculators. Trading CFD contracts is absolutely useless, if you want to participate in profit-sharing of the company, influence on its development, purchase the controlling (blocking) stock interest or draw dividends.