Primary Features of Contracts for Difference

The Contracts for Difference are basically known by many by their initials, CFD. This is basically a contract that is signed between two people basically described as the buyer and the seller. The two come to an agreement where after the seller sells certain assets to the buyer, the buyer is required to pay the difference earned after appreciation of the product. On the other hand, in case the asset's value depreciates; the seller is required to pay the buyer the difference. The Contracts for Difference is a common contract used by investors who take advantage of the appreciation and depreciation of assets. However, to understand the trend better, one has to be familiar with the key features of the contract.

Margin

The key feature that one has to understand about Contracts for Difference is that the trade is done depending on the margin. This is what makes it a popular option when it comes to trade. Instead of paying the total value of the transaction, the trader is only required to give the percentage. This is done during the opening of trade and is generally referred to as the initial margin. The margin gives leverage that enables the trader in contracts for difference gain access to larger shares.

To keep the position open, all the margins in contracts for difference have to be maintained at a level that is over the marked price to the market profits/ losses. When the position goes against the trader to the extent of reducing the cash balance, the trader goes below the required margin level and is hence required to pay additional money. When paying this, the trader is said to be subject to 'Margin Call'. The position has to be open or else it will be closed forcefully.

The Trade

The trade in Contracts for Difference is basically on the rising and the falling of the market. The contract is based on the fact that the value of an asset can either rise or fall. This means that when an asset is sold, within a preset time, either it will have gained value or lost value. The difference between the initial trading price and the closing price is what the investors get to gain. The progress can either favor the buyer or the seller depending on the side on which the market favors. The two parties involved have therefore a considerable chance of earning the profits. The bad news however is that, the contracts for difference is not reliable for long term investment.

Minor Features

There are many other minor features associated with the Contracts for Difference. The investors are not subject to the stamp duty. This is because there is no physical buying of the shares. This has enabled investors to save up to 0.5% when compared to the traditional deals in shares.

The Contracts for Difference also involves commissions. Commissions are charged on the CFDs. The commission is similar to that of ordinary trade share. It is basically calculated not on margin paid but on the total value on the positive side.

The Contracts for Difference gives the view on the shares as well as the indices. In some cases, sectors and currency trading is allowed.

Source: http://ezinearticles.com/6258561

morning glory jamarcus russell creepy internal revenue service emancipation proclamation