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The beginners guide to trading CFDs

by , 06 May 2015

If you're looking for a way to trade stocks and indexes, contracts for difference (CFDs) could be the trading tool for you.

So what are CFDs? What are the key features of CFDs? And why should you think about trading CFDs?

Read on to find out…

What are CFDs?

CFDs are over the counter (OTC) derivatives. This means you don’t trade them through a stock exchange, but through a company or bank that offers CFD trading.

On the other hand, you trade derivatives like single stock futures and options through a stock exchange.

By trading CFDs, you agree to exchange the difference between the opening price of a contract and the closing price of a contract with the market maker. The market maker is a company or bank providing CFD trading.

The key features of CFDs

CFDs derive their value from the value of an underlying asset. For example, a Sasol CFD derives its value from Sasol’s share price.

One CFD is equal to one underlying share.

As you trade CFDs through a company or bank offering CFD trading, they aren’t standardised. Derivatives like single stock futures are standardised.

CFDs don’t have an expiry date. Derivatives like single stock futures have an expiry date.

As long as you hold a CFD trade open, there are daily financing charges:

  • If you buy CFDs (go long), you pay the daily financing charge.
  • If you sell CFDs (go short), you receive the daily financing charge.

Benefits of trading CFDs

As you trade CFDs on margin, you gain full exposure to the price movements of the underlying asset, but you don’t have to pay the full price.

This magnifies your potential profits and losses.

You can short CFDs
If you think the price of a share is going to fall, you can put on a short CFD trade.

Low costs
In comparison to buying and selling shares, CFDs come with lower costs. You don’t have to pay stamp duty, STRATE fees, STT (securities transfer tax) and in some cases VAT.

So there you have it, the beginners guide to trading CFDs.

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The beginners guide to trading CFDs
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