Contracts For Difference (CFD) Trading

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Contracts for difference offer all the traditional benefits of trading shares without having to physically hold them. Contracts for difference (CFDs) mirror the performance of a share or an index. Contracts for difference are traded on margin similar to futrues trading and your profit is your “stake” multiplied by the points difference between your entery and exit price.

Because CFDs trade on margin, investors only need a small proportion of the total value of a position to trade. This obviously means you are often risking more than you would if you owned the shares outright as more often than not you trade a larger volume when trading on margin. Contracts for the difference match any corporate actions that taking place and the holder of a share CFD will receive full cash dividends and participate in stock splits should they happen.

CFDs are not right for everyone. Beause of trading on margin you have ot trade with stops and certainly would not allow for long term buy and hold positions. But naturally you can benefit more greatly when the price of the stock moves in your chosen direction. Had you owned them outright you would have only made a fraction of the profits.

Commission is normally charged for the contracts for difference both opening and closing a transaction. Some commissions charges are hidden in the spread (bid-ask price) and some are added separately to the spread. Eitherway you have to acknowldge their is a cost involved for trading CFDs. As with futures trading many view the costs to be very small but they can be the difference between winning and losing over a basket of trades.

As an independent trader these costs have a large impact on your balance sheet and should be factored into any trading system you trade, whether it be CFDs of Futures. Also note that the spread will have a similar impact and when testing trading methods make sure you use correct bid and ask prices for entries and exits as these are what will trigger your stop and targets.

There are many Contrat For Difference providers to use. Alot of brokers and spreadbetting firms offer them to trade online just like futures so you will just have to do the usual leg work and check out various providers and see what their charges are and what their execution platform is like. As always try before you buy. If they don’t offer a demo or free trial to their platform then maybe they are not worthy of your money.

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