Introduction to CFD (Contracts For Differences) Trading

What are CFDs?

CFDs (Contracts For Differences) are basically another form of financial derivative.
Unlike the other derivatives, CFDs is highly accessible to any investor/trader/speculator. A Contract For Difference (CFD) is a contract between a buyer and a seller to pay the difference between the buy and sell price based on an underlying instrument when the contract is settled.

The concept is best explained by comparing a CFD on shares against physical shares:

CFD
Capital Available:$1030
Buy $10,000 worth of XYZ CFDs at 10% margin
Deposit 10% of $10,000 = -$1000
Commission of -$30
Sell $11,000 worth of XYZ CFDs at 10% margin
Receive $1,000 for price differnce = +$1,000
Return of 10% deposit = +$1,000
Commission of -$30
8% p.a. interest cost on implied Loan of $10,000 = (.08*3/12*10000) = -$200

Profit = -1000 -30 +1000 +1000 -30 -200 = $740

Share
Capital Available:$1030
Buy 1000 XYZ Share at $1 on 30/6/05 = -$1000
Commission of -$30
Sell 1000 XYZ Share at $1.1 on 30/9/05 = +$1000
Commission of -$30


Profit = -1000 – 30 + 1100 -30 = $40

I have made many assumptions in giving the simplified cfd trading example above. Please note that it could just as easily been a very large loss in the CFD, the example serves to show the magnifying impact of leverage.

For more CFD information and a CFD Brokers and Providers and Comparison please visit:
http://www.cfdproviders.com

This article was provided by Jimmy Kwong for the website /www.cfdproviders.com