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A Contract for Difference (CFD) is a settlement made between two different parties that are looking to exchange the difference in the opening price and the closing of a contract. CFD’s are derivative products which allow you to trade on live market price movements deprived of having to own the fundamental payment of which the contract was based upon.
CFDs can be used to predict future movements of market prices despite whether the original markets are declining or increasing. Investors can go short-term, allowing them to profit from decreasing prices or hedge their portfolios to offset any probable loss of physical investments. Furthermore, with over 12,000 markets to trade, investors are able to gain exposure to markets that may have had no access before.
CFDs are leveraged products that allow you to trade by paying only a small proportion of the total value of the contract. This means that you can theoretically magnify your return on investment. CFDs also allow investors to go long (buy) if they believed that the market prices were to increase in the future or alternatively go short if they thought it was going to decrease instead. If you truly believed that a company or market was going to experience somewhat of a loss of value in the short term, then it is possible for you to use CFDs to sell it straight away which will then make your profits increase in line with any drop in that price. In saying this, if the market were to move against what you had thought, then your supposed losses would also increase. This shows how CFDs are a flexible alternative to trading the movements of market values as they allow you to benefit from any type of move, whether it is increasing or decreasing.
If you thought that existing portfolios may lose some of its value, by using CFDs you are able to offset this loss by short selling. For instance, if you were to hold £5,000 worth of Vodafone shares within your portfolio, you would then be able to short sell the equivalent of the £5,000 worth of Vodafone shares via a CFD trade. Should any of Vodafone’s share prices drop by 5% in the underlying market, the harm in worth of your share portfolio would be counterbalanced by a gain in your short sell CFD trade. Many investors, nowadays, tend to use CFDs to hedge their portfolios, particularly in unpredictable markets.
With CFDs being a leveraged product, they provide a much higher leverage than the normal traditional trading. Standard leverage in the CFD market usually starts with as little as a 2% margin requirement. Margin requirements may go up to 20%, depending on the underlying asset, such as shares. CFDs also have many other advantages with the higher leverage and no day trading requirements. Some markets need a minimum amount of capital to day trade or they decide to place limits on the number of day trades that is possible within certain accounts. CFDs are not bound to any of these types of restrictions and other traders can day trade if they chose to. Accounts are often opened for as little as $1000, although $2000 and $5000 are too common minimum deposit requirements.
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