What Is CFD
CFD stands for Contract For Difference and is a type of security that allows two parties to exchange between themselves the difference in opening and closing prices of any contract. CFD trading allows a trader to speculate based on the rise or fall in prices of different global financial markets. CFDs are used for trading Forex, indices, commodities, shares, and treasuries. The contract is settled using cash, instead of physical delivery of securities and thus, it is easier to settle. This aspect secures lower commission rates, more favorable tax conditions and the ability of clients to speculate on declining prices.
CFDs are offered across numerous regulatory jurisdictions such as Australia, Canada, Cyprus, France, Germany, Hong Kong, Ireland, Japan, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, and New Zealand. They are not permitted in some other countries, like the United States, where retail investors can not trade CFDs due to regulatory restrictions on this instrument. Instead, U.S. traders are forced to trade the futures markets, where the margin requirements to open a position are much higher and sometimes unattainable for the average retail investor.
Benefits from Trading CFDs
Below we listed the benefits that a trader can make use of from trading CFDs vs. conventional means of trading:
Trade with leverage
No Stamp Duty
Trade on leverage
CFD contracts provide access to leverage, which allows investors to generate higher returns with a relatively small initial deposit. However, leverage can also magnify losses to the point where those exceed the initial deposit. Traders should be mindful of this risk. The typical leverage is 25 times the deposited amount, and this means that a trader that holds a position worth $100,000 only needs to deposit $4,000 into his/her CFD trading account.
Trading costs of CFD trading are lower than traditional investing or trading as the investor is not buying the actual underlying financial asset, rather the investor is speculating on the price change. For its clients, Amana is only charing the spread between the bid and the ask price. The spread is derived from the underlying market, as most CFD brokers add a markup to it.
No Stamp Duty
Trading in CFDs does not include any stamp duty since these types of contracts are a replica of the underlying product such as a futures contract or a share. Therefore, investors who choose to trade CFDs will avoid the tax liability that they would incur by trading in the underlying instrument.
Last but not the least, trading in CFDs takes place 24 hours a day, five and a half days a week. Even if the underlying market remains closed, a trader can sometimes still trade CFDs.