What is CFD Trading
For example, when applied to equities, such a contract is an equity derivative that enables investors to speculate on share price movements, without the need for ownership of the underlying shares. Most CFD providers will hedge these positions based on their own risk model, which may be as simple as buying or selling the underlying, but may also be via portfolio hedges or by consolidating trader’s positions and offsetting one trader long with another client short position.
When trading CFD, the trader does not actually buy and sells the actual underlying instrument through an exchange – what the trader does is to initiate a contract between himself and the CFD broker whereby he agrees to be paid or pay the difference in cash when the contract is closed.
A stop loss order can be set to trigger an exit point as pre-determined by the trader e.g. Buy at $5.00 with a stop loss at $3.60. Once the stop loss is triggered, a sell signal is initiated to the CFD provider and actioned in accordance with their terms of business and taking into account available liquidity to action the request.
The Australian financial regulator ASIC implies that trading CFDs is riskier than gambling on horses or going to a casino. It recommends that trading CFDs should be carried out by traders who have extensive experience of trading, in particular during volatile markets and can afford losses that any trading system cannot avoid.
It should be noted that when a CFD trade is opened, the position will show a loss equal to the size of the spread So if the spread is 5 cents with CFD brokers, the stock will need to appreciate 5 cents for the position to be at a breakeven price If you owned the stock outright, you would be seeing a 5-cent gain, yet you would have paid a commission and have a larger capital outlay.