LONDON, January 24, 2011 /PRNewswire/ --
Here are five of the most frequently asked CFD trading (http://www.cityindex.co.uk/cfd-trading/) questions, answered.
1. What is a CFD?
CFDs, or Contracts for Difference, represent an agreement between two parties (a buyer and a seller) to exchange the difference between the opening price and closing price of indices, currencies, commodities and more. If the difference between the two prices is positive, the seller pays the buyer. If it is negative, the buyer makes a loss instead.
2. What are the origins of CFD trading?
CFD trading (http://www.cityindex.co.uk/cfd-trading/) came about in the early 1990s in London to allow professional traders to speculate on price movements, with any profits made exempt from stamp duty. CFD trading is still free from stamp duty today*. At first, CFDs were used primarily by traders wishing to hedge their exposure to the London Stock Exchange. By 2000, however, retail traders were CFD trading on everything from indices and commodities to shares and currencies. Today, CFD trading providers such as City Index (http://www.cityindex.co.uk/) offer more than 12,000 markets on which to trade CFDs.
3. How does CFD trading work?
Like financial spread betting, CFD trading allows you to speculate on the price movements of financial markets without ever actually owning the underlying instrument. There is another similarity to financial spread betting in that CFD trading is also a leveraged product. This allows you to trade by paying only a small fraction of the actual value of the contract - potentially magnifying both your profits and losses accordingly.
You can open a CFD trading position to speculate that a price will move up or down, meaning that you can profit in a falling market as well as a rising one. CFD trading platforms therefore quote a 'buy' and a 'sell' price for every market, and you open a position according to the direction in which you believe the market will move.
4. How do you hedge with CFD trading?
The fact that CFDs ( http://www.cityindex.co.uk/cfd-trading/what-is-cfd-trading.aspx) allow you to short sell and therefore profit from falling market prices means that investors often employ them as a 'hedging' tool for their portfolios. For example, if you had a long-term portfolio that you wished to keep, but felt that there was a short-term risk to the value of your investments, you could use CFDs to offset a short-term loss by 'hedging' your position - that is, opening an equivalent CFD trade in the opposite direction. By doing this, a loss in your portfolio will be offset by a roughly equivalent gain in your CFD trading, and vice versa, consequently enabling you to keep your portfolio at roughly the same value regardless of market conditions.
5. What is the difference between CFD trading and financial spread betting?
One difference between the two is that financial spread betting (http://www.cityindex.co.uk/spread-betting/) is only ever monetised in your base currency (usually sterling), whereas CFD trading is monetised in the underlying market currency (e.g. if you trade CFDs on a US exchange, then your profits or losses will be realised in US dollars). Another contrast is that any CFD trading gains you may make incur UK Capital Gains Tax, which spread betting gains do not*.
The most important thing to remember is that financial spread betting and contracts for difference (http://www.cityindex.co.uk/cfd-trading/) trading both carry a high level of risk, so you should always ensure you completely understand them before committing your own money.
Learn more about CFD trading at
http://www.cityindex.co.uk/cfd-trading/.
About City Index:
Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.
As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, contracts for differences (CFDs) (http://www.cityindex.co.uk/cfd-trading/what-is-cfd-trading.aspx) and, in the UK, spread betting.
We constantly look to widen the range of assets we offer, improve the performance of our platforms and expand the range of services we provide. The result is that our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer service and support.
Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.
*Spread betting and CFD trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.
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