CFD Trading: Contract between a Buyer and a Seller

Posted by icmarkets on February 21st, 2015

CFD trading revolves around contracts for difference or agreements between two parties (a buyer and a seller) to exchange the difference between a contract's opening and closing price. CFDs are essentially derivatives products, which enable trading on live price movements without having to own the underlying trade instrument on which the contract is based.

CFDs can be used to predict or speculate future market price movements regardless of the rise and fall of the underlying markets. As a trader, you can go short to allow profit from falling prices or alternatively hedge your portfolio in order to offset potential loss in your physical investments. Advanced CFD platforms even give you access to thousands of markets to participate in, which allows you to gain exposure to a great range of markers you may not have access to otherwise. When choosing a CFD trading platform go for one that will provide you with prices on currencies, indices, shares, commodities, and other profitable markets that will complement your portfolio.

Because CFDs are leveraged products, you are allowed to trade them by paying only a small fraction of the contract's total value. This equates to a great chance of magnifying your ROI. However, you should also remember that the higher the leverage, the greater your risk of loss is, which is why it is important to make informed decisions when making a trade.

CFD trading is unique from other markets in many ways. One of the most notable distinction is your ability to go long (buy) or go short (sell) if you believe that the market prices will rise or fall, respectively. If you speculate that a market or a company will experience loss in the short term, you may use CFDs to sell it, thus helping your profits increase with the fall in that particular price. On the other hand, if the market moves against your speculation, your loss will also increase. This makes CFDs a flexible alternative to trading movements of market prices.

CFDs also provide a good hedge for your portfolio. If you believe that your existing portfolio may lose value, you may use CFDs to offset the loss by short selling it. Additionally, CFDs can also be tax efficient, as you can use losses incurred to offset against CGT or capital gains tax liabilities, depending on your circumstances. Today's CFD platforms also allow you to access your account and continue trading whenever and wherever you please, which allows for flexible trading 24/7.

About IC Markets

Headquartered in Sydney, International Capital Markets Pty Ltd is a provider of online forex trading services, offering individual traders, money managers and institutional customers proprietary technology, tools and education to trade online. IC Markets has distinguished itself among industry leaders with its unique True ECN forex technology, proprietary tools and services, and remarkable focus on customer service. IC Markets is regulated by the Australian Securities and Investments Commission in Australia.