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Saturday, May 24, 2008

CFD trading

The rising oil, energy and commodities may be hurting consumers, but the stocks of many companies dealing with oil, energy, and commodities have been going up recently. While many investors buy stocks and options to invest in such companies, other alternative financial securities are also gaining in popularity. One such security is contract for difference or CFD.

A CFD is essentially a contractual agreement between two parties (buyer and seller) to exchange the difference between the opening price and the closing price of the position on various financial instruments at the close of the contract. Depending on the difference between the current value of the underlying instrument and its value at the close of the contract, either the seller or the buyer will have to pay the difference to the other contract party (buyer or seller). When used for equities, a CFD is essentially a derivative that allows traders to speculate on price movements of a stock, without having to own the underlying stock.

The important feature of most CFDs is that you don't actually buy the financial instrument (stock, commodities etc). Instead you are buying the difference between the opening and closing prices. For example, instead of buying 100 shares of Oracle, you are buying the difference on 100 shares of Oracle.

CFD trading can be used for trading or speculating on various financial instruments, including stocks, commodities, futures, and equities. CFDs are gaining in popularity as they require low initial deposit, low commissions, and can be used for both speculation and hedging purposes. Like stocks and many other financial instruments, you can go long or short on CFDs. A long CFD position results in profit if the the underlying commodity goes up in price, while a short position results in profit if the price of the underlying commodity falls. The can be traded in the minimum deal size of 0.1 lot which means 10 shares.

Currently, CFDs are listed in various countries around the world, including Australia, UK, Germany Canada, Spain, France, New Zealand, Singapore, Italy, South Africa and so forth. However, CFDs are currently not permitted in the US. CFDs can be purchased through CFD Providers such as One Financial.

One Financial is an online stock market trading broker. It provides 24-hour stock trading programs and CFD trading facilities to investors in foreign exchange, stocks, indices and futures. One Financial is based in London, and is authorized & regulated by the Financial Services Authority. One Financial provides its clients an easy to use online trading platform for trading forex, international indices, ETFs, and so forth. It also offers free charting, news, analytics and 24 hours customer support.

Important caveats before trading CFDs:

While trading in CFDs typically involves low commissions, you should be aware that CFDs are margin products which means it involves leverage. Since they are margin products, you don't need to provide a deposit to cover the entire amount of contract but need to provide only a certain percentage of the entire contract. However, since margin trading involves leverage, as a investor, you should be careful since leverage increases the potential for not just substantial profits but it could also result in substantial losses if your trade goes wrong. As a result, before trading CFDs, it is essential to understand the underlying risks because your losses may not be limited to just the initial investment but it could be much more. Similarly, CFD trading involves potential for counter-party risk or the risk that the counter-party in the contract may not be financial stable to meet its obligations when due. Thus investors in CFDs can lose substantially from the counter-party risk even if they bet correctly on the direction of the underlying instrument.

For more info about One Financial, see:

One Financial

(Disclaimer: I am not an expert in trading of CFDs, stocks or any other securities. Investing in CFDs, stocks or other securities involves risk and can lead to substantial losses.)

posted by Ruby @ 1:58 AM

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