Contracts For Difference (CFD) has become extraordinarily popular nowadays. It changed the face of hedging and share trading. Why does everyone get interested in it? CFD is powerful, simple, flexible, and gives you the benefits of whether the price rises or falls. Previously, CFD was only accessible to institutional investors. But now, the investing public is given access to it. Trading CFDs are similar to spread betting which allows you to put up with an investment without actually owning an underlying asset.
CFD traders are allowed to open short positions while avoiding the payment for the stamp duty. The returns in CFD are usually measured using a small percentage. In Contracts for Difference, an agreement is made between a CFD broker and trader to ‘buy’ an asset at the current price then selling it later to settle down the difference.
But it isn’t that easy. A trader needs to have suitable knowledge and experience, even if it’s just a demo account. It is also important to note that there is no right or wrong way of trading. Even the most successful traders and investors still experience loss. What you need the most is a strategy to counter the possible string of losses that can hurt your investment.
The Transparency of CFD
There are a lot of equity derivatives but CFD is very different. It is transparent when it comes to pricing and mirrors the actual market price of the chosen underlying asset. Though CFD trading and normal share trading are almost the same, they have a very important difference when it comes to stamp duty. When you trade with CFD, you buy or sell stock and the hedging transaction happens then it appears to the provider’s name but not under the investor’s name. This gives traders the chance to avoid the payment for stamp duty.
CFD Does Not Have Fixed Expiry
In CFD, there are no such things as settlement dates or fixed expiry of your trades. Your position remains open as to your likes. You may want to go for long or short trades depending on your prediction as to when it will rise and fall. Though no expiry is given, traders must not be comfortable with the flow. The financial market is unpredictable, you must prepare a risk management plan or stop loss to avoid emptying your account.
The Stop-Loss System
Before anything else, you must prepare a stop-loss in case the market turns its back on you. If you don’t have one and your trading position goes down, you will experience two things – your broker will request more funds or your broker will simply close your position.
CFD Usage in Merger and Acquisition Activity
The first known example of this was Shami Ahmed of Joe Bloggs Jeanswear which happened around 2002. He used trading CFDs to build a stake in Moss Bros which suffered weak sales as well as falling shares. Eventually, the stake of Ahmed was realized and he accomplished 20% of the retail chain of Moss Bros. Soon, Ahmed sold his trading position to Kevin Stanford, as with his voting rights. Now, Stanford currently owns 28% of Moss Bros who recently had fair improvement of the company share price.