Some of us have heard about trading CFD (Contracts for Difference) but we may not have enough knowledge about what CFD actually is.
We sometimes hear news or stories about trading shares, some of us might even traded shares as well, but the concept of online CFD trading is a bit different.
Difference between trading CFD and trading shares
CFD is the short form used for Contract for difference and it is a contract between the trader and the CFD provider. Unlike you invest in shares when you invest in CFD you are not actually buying or trading the underlying asset but what you are buying is a contract between yourself and the provider.
Since all you own is a contract with the CFD provider, you are also assuming that the CFD provider is in good financial position to meet the obligations with you.
Also since you are not actually trading an asset and the value of the CFD is derived from the value of the asset underlying, possibility is that the tracking is not exact.
The small differences in values can cause significant gains or losses. So, before you actually invest real money in this, practice trading CFD at www.xtrade.com with a demo account.
What is underlying asset in online CFD trading?
When you are trading CFD i.e. buy or sell it, you are actually making an agreement that you trade the differences in the values of an underlying asset in between a present and a future date.
In CFDs the providers give you the chance to trade on a range of underlying assets. Shares are not only the underlying assets but there are many others which include commodities, Forex and others.
CFD providers also allow trading CFD online in certain market indices such as ASX 100 which demonstrates the price movements in all the top 100 stocks listed in ASX (Australian Securities Exchange).
If you want to trade CFD, you need to know not only how the online CFD trading works but also about the underlying asset. For example you are using Forex as an underlying asset, you need to understand the working of the Forex market and also the experience of Forex trading. The same goes with all other underlying assets like Stocks, commodities etc.
All the CFD providers are obliged legally to give you a disclosure document called Product Disclosure statement before you start opening an account. The document clearly states what the underlying assets are.
It is very important for you to read that document. Meanwhile you also need to know well about the working of the trading CFD and its difference from the other ways of financial trading. Then also you will be able to trade successfully in the CFD market.
Some special features of CFD trading
- CFDs might seem similar to traditional investments like shares but they are a bit different
- CFDs are not standardized and every provider for online CFD trading has its own terms and conditions
- In CFDs the risks and charges of holding assets are eliminated.