Financial Gaming Guide

Easy to use and simple to understand, CFD or contracts for difference trading is a good financial tool to use for new as well as experienced investors. A CFD trade is an OTC (over the counter) agreement where the parties agree to exchange an amount of money equivalent to the difference between the opening and closing price multiplied by the number of underlying shares as specified in the contract.

 It does sound a little complicated at first but is not actually so in practice. Anyone with a little knowledge of finance can execute a CFD trade with ease. CFD trading has been in vogue for over a decade in the UK market and is used by many hedge funds and institutional investors to invest their surplus money. In fact, CFD trading is looked upon as an alternative to spread betting since both are margin financial products and can be used to take a position resulting in the available funds being multiplied.

Using CFD trading, taking a margin position is very easy. For example if the underlying stock you are looking at has a margin of 10% and you want to establish a position of £10,000, you would need to invest only £1,000 as an initial deposit. Profits emanating from the CFD trade while running can be used to take new positions and all running losses need to be made good by adding additional funds or reducing the position.

A great advantage with CFD trading as in spread betting is that they are exempt from taxes like stamp duty in the UK (a 0.5% saving). The only taxation that CFD trades are subject to are the capital gains. In comparison, spread bets are also exempt from capital gains but losses in spread bets cannot be offset against future gains as in CFD trades. Trading in CFD’s is similar to buying stocks or shares but without the ownership issues that come with traditional stock trading. In fact, CFD trading mimics stock brokering in every way apart from the payout and the paperwork. To exemplify, if a CFD trade position is held long enough, the benefits accruing from dividends issued on underlying shares can also be made use of.

When we compare CFD trading to spread betting or binary options, it is important to understand that each one of them has its own way of working and its own advantages and disadvantages. There is no one “best instrument” to use, it actually depends on the investor, his or her goals and the appeal of each such trading practices to the psychology of the investor. Most important aspect to remember is that all these trading options are not substitutes to long term investments like buying government bonds or even bank savings. So, it is important to remember and ascertain the risk of trading while getting into such high-risk, high-return ventures with your hard-earned money.

CFD trading is particularly suited to those investors who are already experienced in stock trading and are looking for something more scintillating or exciting.