subject: Learn about Contracts For Difference [print this page] Learn about Contracts For Difference Learn about Contracts For Difference
CFD Trading is a concept that originated in London during the early period of the 1990s. The basic idea behind this concept is a contract between two parties. One can be called the seller and the other can be called the buyer. They enter into an agreement or contract that specifies the conditions of what is expected to happen within a defined time period. The amount paid is the difference between the values of the share or assets at the end of the contract period and at the beginning of the contract. If it is positive the seller pays, otherwise the buyer pays. The main advantage of this kind of trading is that you do not have to actually own the share to make profits from it. This kind of trading is based on speculation. Due to the fact that there is no actual transfer of ownership of any asset, it is not allowed in many countries like USA.
There are many companies that provide CFD trading. This kind of trading is subject to market risks, like all other kinds of stock or forex trading. The other risks include counterparty risk and liquidation risk. CFD Trading has come under criticism for many reasons. First of all, it is based on speculation. Another issue is the transparency involved. Many of the companies involved in CFD Trading do not fully explain the risks involved in this kind of trading. They advertise showing only the amount of profit that can be made and do not explain the psychological factor that is involved. In fact, the client does not always learn this until he changes a practice trading account into a real account. By then it might be too late and the client may have already suffered losses. This means that companies can easily exploit clients who are new to the stock market. Thus, CFD Trading is considered by some regulators to be more risky than normal stock trading, even though it can bring more profits.
