A CFD also knows as a Contract for Difference, is an instrument in the field of finance that enables investors to take advantage in the stock, index or commodity price when changes occur. One can sell or buy a CFD even when one does not physically own the asset. This means, investors like it since one can take short-term positions and make day trades at the go. CFDs are a product of leverage. Traders are given the chance to speculate on the direction that a market could be headed while having to place a fraction of the position’s face value that one would do in the future markets, FX or equity.
CFDs from actual Assets
CFDs are different from selling or buying actual assets. When dealing with CFDs, one doesn’t really own the asset. Simply put, what happens is one is taking position on the assets price. Alternatively it can be said that one is placing a bet on what the asset’s price is and what it will be in that one does not have to buy the real asset and wait for the results.
Growth of CFD Trading
Going by the last few years, trading in CFDs has gained popularity a lot. This in part can be attributed to the convenience of taking positions by the use of this financial instrument. Most people are also coming to terms with how to use this financial instrument to help them make investments so as to earn money. CFDs give a lot of options and flexibility and that is why many are in turn joining online brokerage companies; such as CMC Markets, that help them trade in all asset types such as indices, stocks, forex, commodities and futures. Using CFDs, there is no set limit to what one can trade.
Day Trading vs. CFD Trading
Compared to Day Trading, CFD trading has some several advantages. One of the advantages is with regards to commissions and fees. CFD trading keeps both of them on the low end. The brokerage company does not have to go into any process of purchasing the asset when an investor has purchased it. This means that they can carry out your position with ease since not much is involved. This helps keep fees low for the investor.
Swing trading and day trading require more often than not that the trader take the asset’s ownership physically. This means that the brokerage has to take additional steps so as to finalize the transaction which means, your position as an investor will suffer some delays.
Both a day trade and CFD react to price fluctuations of the same nature. This means that the investor has the option of carrying out day trade using CFDs. This will result in an added benefit of a lower overhead.
CFD trading is simple and the practice is catching on very fast with more and more people getting to learn about it and making investments with its help. It’s a financial instrument that is revolutionizing how trade is been carried out.
Recently in Germany, the German financial regulator of markets; BaFin, had its head talking about prohibition. The financial product in question to be prohibited was a certificate that is distributed to retail investors in banks. This information was published in Die Welt; a German newspaper. BaFin was moving to prohibit the product because they feel it’s unsuitable to the retail investors. They see it as been too complex. BaFin also stated that since CFDs and other binary options are catching on in Germany quickly, they will closely monitor their development and move to intervene in the future.
Although BaFin did not go into the details of how they would intervene in the near future, it is safe to assume that they have a range of options to go by. They could reduce the leverage say from 400 to about 50. They could move to monitor broker execution more closely and come up with account airbags that would ensure traders don’t lose more than that which is in their accounts. They could even prohibit the trade of CFDs entirely.
As of the moment, BaFin has no plans on how to precisely go over the matter, but this could change. If there were to be some sort of a scandal in the German market and the press gets wind of the issue and moves to air it, BaFin will be forced into action and they would most definitely do something about it. In Germany there is a tendency to reduce trading in certificates and CFDs so as to bring the volume to exchanges that are regulated such as the EUREX and Deutsche Borse. It is projected that in the next two years or so, we will be able to see the kind of intervention that BaFin said they would implement.