Friday, December 4, 2009

CFD trading


If you're a newbie who had just entered into the trading world, you may be strucked with many hi-fi terms that made you dizzy and probable go bald if you try to understand all of them. One of them are CFDs. Many traders maybe good at anticipating the ups and downs of the market without really understanding the real entity that they're trading or invest their hard earned money into. So, what the heck is a CFD?

CFD, also "contract for difference" are products that are offered by brokers. For example, we can trade the Citibank stock or the Citibank CFD. The difference is we can only long the Citibank stock and sell it later by paying the full amount of money that the stock is worth while, in the CFD contact, we pay only a fraction of it. That means we are trading CFD with leverage. For example, to buy 1000 shares of $9.60 ABC stock we need to pay $9600. In the CFD contact of the ABC, we need to pay perhaps only $960 (if required margin is 10%) to trade the stock. And in CFDs, we can either long(buy) or short(sell) the stock to make money. It also mean, we can profit or loss in the market is the stock is going up or down. So why trade the stock if we can trade the CFD? Why the heck is it so complicated?

The answer is quite simple actually; online game players will find this a child's play theory. A CFD market is a virtual market created by the brokers using live market data feed. The price of the stock follows the actual price but the market is regulated by the broker but not the government. Stocks in the other hand is regulated by government body. For instance stocks in Malaysia are regulated by Bursa Saham Malaysia.In my opinion, trading the CFD has not much difference with playing an online game. By buying the CFD we are not the actual share holder of the company. If the company announces dividen yield, the broker will pay us if we're in a long position and we'll pay the broker if we're in a short position.

There'll be another trader to buy or sell the contracts from us shall we make the trade. Say you're buying 100 shares of ABC in a CFD contract and there are short position of 200 shares, the broker simply buy 100 shares of the actual stock to hedge the market. If you make too much money, the broker deserves the right to close your trade. In another word, the broker will never lose. So what does he gain for providing all these complicated trades? That will be your trading commission. It also means, it's literally impossible for the broker to lose. Trading in CFD has scarce difference from gambling big and small in Las Vegas. Both has only 2 options for us to choose.

In summary, the broker created a market out of nothing but a computer and license. It is almost like cheating. In this market, it is like playing online game where the  game master is invincible. I will gladly give away my testicle to obtain a license like that. Tell me, who wouldn't?

p/s: this is simplified version for the sake of the noobs. Actually I'm also a noob! lol

8 comments:

Cals1133 said...

nice article , do you still trade CFD's?

Peter Mathers said...

Hi How Jun,

its very informative to know more about cfd trading
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Josbus Truk said...

The forex market is one of the most complex markets in the world. Unlike traditional markets that only remain open during certain times of the day, the forex market runs round the clock. The foreign exchange market focuses on the trading of different currencies. If you own a pair of currencies, you can make a profit if the trading values increase or decrease between the two. Needless to say, forex trading is a great way to make some extra cash on the side. However, before you can start trading with actual money, it is important to learn the ropes first. That’s why most people use demo accounts, which are realistic accounts, except the money used is virtual.

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lucky said...

I wouldn't go as far as saying that CFDs are a gambling instrument. CFDs are basically trading and if you can predict the market direction you can make money trading contracts for difference. While some would say there is very little difference between CFDs and gambling the ATO did beg to differ. According to the Australian Tax Office: 'CFD trading requires a high degree of skill than mere luck or chance and therefore is not comparable to gambling'. The ruling does not anticipate a 'gambling' outcome in most CFD trading. See http://www.contracts-for-difference.com/Is-trading-gambling.html

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candida wood said...

Great detailed information on CFD market and trading, I ll be visiting you more frequently, It is very interesting information.