What is CFD?

CFDs (Contracts for Difference) are becoming more and more popular nowadays. The reasons of growing popularity are the following:

• Short trading. Contract for Difference appeals to short sellers. From the point of view of the value the short trading becomes more effective, and from the point of view of execution it becomes much easier as against to the conventional share trading.
• No commission and low margin requirements. You can make transactions even if you don’t have the whole value of the trade. You are only required to lodge a percentage of the value, known as margin and it’s typically between 5 and 10 %. So, you can trade a full portfolio of shares without having to tie up large amount of your capital.
• Market prices. You trade with the market spread so you are quoted the same prices as the stock market’s professionals.
• High-speed execution. Your transactions will be executed at the moment you give an order without any delays.
• Markets. At present time you are allowed to trade shares, listed in Dow Jones Index, ETFs and futures. The range of instruments is subject to change.
• Contract size. Minimum contract size is 0.1 lot = 10 shares. In this case the margin is $10-150 (depending on the price of the share). The margin for the minimal contract to trade on US Stock Exchange is around $35-70 (valid for the end on February, 2003).
• Hedging strategies. If you are a shareholder, and you don’t intend to sell your shares even if the price fall, you can open a short position on CFD on any share (or the whole portfolio). As a result your losses on the basic asset will be compensated by the profit on relevant CFD.

A contract for difference is an agreement to exchange the difference between the opening and closing price of the position under the contract on various financial instruments.