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Article Contributed by George Polizogopoulos
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CFD Trading: An Introduction: Part 1
Contracts For Difference or frequently referred to as CFDs is a
financial vehicle gaining in popularity with private traders for
its flexibility and features. A CFD has many advantages and for
any trader it is yet another useful tool to use in the business
of trading. CFD trading has been used in the UK stock
market for a number of years now but the trading was largely
restricted to large institutions. Recently the scope for CFD
trading has expanded to include private investors in the action.
This enables the small private trader to participate in trading
the performance of a stock as opposed to owning the actual
equity.
CFD trading has revolutionized the personal share trading
industry by allowing traders to enter into a trade without
putting up the full capital into the investment. Trading CFDs
has allowed traders to have a low cost exposure to equity
movements which is especially important for the trader's bottom
line. Depending on which country you're in this financial
instrument attracts no stamp duty. These unique CFD features are
an attractive advantage for traders who make a living from the
markets.
You must remember that CFDs are a derivative of an actual
vanilla price. That is, CFDs derive their value as a result of
the price of an underlying instrument or price - such as the
price of the actual share or commodity. Therefore CFD trading
encompasses gearing and hence this financial vehicle should be
used with caution by beginners.
The origin of CFD's began when the need of non market makers to
be able to short stock increased in the 1990s in the UK equity
market. This is the story of the beginnings of CFD trading.
Before this push for CFDs by non market makers, only the market
makers were able to short stocks and these were mostly large
investment banks. The users of this system managed by the
investment banks were typically the hedge funds, arbitrageurs as
well as other funds utilizing neutral market strategies. Demand
grew out of long contract transactions to be able to short
stocks. No stamp duty is paid on CFD trading because no real
stock transfer of ownership takes place. And as no actual change
of ownership takes place, the trader does not have any ownership
rights such as the right to vote. But on the other hand CFDs
expose the trader to the real time performance of a stock price
including dividends and corporate actions.
Now when traders enter into a trade most CFD firms choose to
hedge their position directly into the underlying market for all
CFD transactions. This feature may or not be one of the
important points in choosing a CFD provider, as some may not
hedge all positions. It is your decision whether you will risk
having a provider that hedges every trade or simply a provider
that hedges some trades. For those providers that directly hedge
all their trades, CFD liquidity is almost always a reflection of
the liquidity of the underlying stock in its underlying
marketplace. And with today's technology, CFD trading
transactions are instantaneous.
This article "CFD Trading: An Introduction: Part
1" can be found in our Derivatives - CFDs category.
About the author:
George Polizogopoulos is a staff writer for MyShareTrading.com, an information hub for traders: forex, shares, derivatives,
CFD's. MyShareTrading.com also provides free blogs for traders
who wish to share their market experiences.
You may republish this article on the condition that it is not
edited and all html links to our website is kept intact.
MyShareTrading.com © 2006
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