Cfd Trading

Written by BK Shaw
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CFD trading (contracts for difference) takes advantage of gearing or leveraging similarly to the commodity futures markets. You do not need to own the underlying stocks to lose or make money from movements in stock prices. You can play the price of a stock to go up or down, and if you're right on the price direction, you can stand to make big profits because of the leverage.

As with many investment vehicles today, electronic trading platforms are readily available removing the need for the execution of orders on the floor. This allows for expeditious trading with better prices often. Although you do not benefit from the broker's relationships with traders on the floor, the liquidity of an electronic platform can be even more effective in the getting in or out of a market with the price you want.

The primary benefit of CFD trading is the fact the contract is leveraged up to 10 times. This means that a 10 percent movement in price can result in your doubling your money. Obviously the downside potential is great, and so these markets as with any other financial market should only ever be traded with risk capital. When shorting the stock, or betting on a price drop, there is no need to borrow the stock first.

Hedging your Stock Portfolio using CFD Trading

If you feel a downturn in the market is imminent, you can protect yourself by trading this way. A few contracts sold short will benefit from a drop in price. Your stock portfolio may drop in value temporarily, but if you timed your CFD trading correctly, you could end up profiting from such a move.

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