Forex trading

Trade contracts for difference

Written by forex

The financial markets has opened new prospective highly profitable ways of earning. One of the most common of their types – Forex, allowing you to profit on a change in the attitude of the current values of the two currencies. In this article we will focus on less common, but is rapidly gaining popularity method of trading contracts for difference prices.

This method is designated as the CFD English abbreviation formed by the initial letters of the expression Contract For Difference. It’s the equivalent Russian expression “contract for difference” that describes the financial instrument that provides everyone the possibility of earning on the dynamics of asset prices in the absence of the necessity of possession of the traded asset. Income denominated in a particular currency is obtained as in the fall, and the growth rate.

Figure 1. Trade contracts for difference.CFD is a contract concluded by two entities, one of which holds through a broker an offer with the price at which he agreed to commit a particular transaction. the buyer and seller. This proposal is executed in the form of the transaction upon receipt of counter offers with the same price. The subject, acquiring CFD is a buyer, and implements. As a result, they open two different direction of the position (one short, the other long). Subsequently, if one of the parties wants to close out his position, then this can be done in tandem with any other the opposite direction but with the same price range (not necessarily provided by the entity in the pair from which the position was opened). Therefore, each subject of a commercial transaction contracts for difference (CFDs) available termination at any time.In this case, if the transaction is committed at the price of the asset is lower than when it was terminated, the seller to the CFD buyer receives the difference expressed in the currency of the transaction and is proportional to its volume. The higher the price of the asset at the time of termination of the transaction, the income is charged to the buyer, the seller is debited equivalent to the loss.

CFD is a category of financial instruments formed by combining the underlying asset and currency. Persons trading in CFD does not own the asset. Accordingly, the object of trading contracts for difference – the price of the underlying asset.

Why was invented the trade contracts roznicowanie trading operations with shares requires the acquiring their behalf payment of tax. Only after that the shares are his property. The size of this tax is sometimes quite substantial and often makes such transactions unprofitable. Therefore, in the beginning of the last decade of the 20th century was implemented the scheme described in the previous paragraphs, and called the contract for difference. It has provided traders with the opportunity to make transactions without changing the owner of the shares, which eliminates the need to pay tax for this transaction.

Figure 2. Trade contract for difference.

Based on the nature of CFDs, their assets can only be exchange – currency (real, numeric), securities, commodities, indexes, etc.

The nuances of trading contracts for difference

The vast majority of the characteristics of Forex instruments, CFDs are present in:

    • It is permissible to make a number of transactions, limited only by the size of the Deposit.
    • There is a spread, calculated as the module of the subtraction of demand from the proposal (in the special case when the equality, the spread is 0).
    • The validity of margin trading with leverage, allowing with the same amount of the Deposit due to the increased risk of transactions to obtain increased profit (besides decreases the minimum Deposit required for the possibility of opening positions on contracts for difference, in comparison with that required for direct purchases of the asset).
    • The lack of an inheritance when buying a CFD the rights and obligations for the underlying asset.
    • Earn allows any dynamics of the asset price (upward and downward) that are predicted correctly.

It should be noted that contracts for differences you may experience slippage during placement and execution of the application. However, it is especially noticeable when there is high volatility, rarely observed in the CFD, and therefore, for this type of financial instruments does not apply to an important feature. Besides, CFD is more often in medium and long – term TC (almost never on the scalp), characterized by little influence of the spread, because the goals are usually two or more orders of magnitude higher.Advantages of trading contracts for difference CFD

The ability to implement trade in all their range one trading platform, functionality, absolutely similar to the Forex trading terminal that is implemented in practice (contracts for difference traded through the MetaTrader using all of its features technical analysis).

Figure 3. CFD – contract for difference that allows you to trade remotely via the Internet.

With the relevant CFD, you can implement a hedging portfolio assets in any proportions.

About the author


Leave a Comment