What is a CFD?

Lots of newbies asked me about CFD (Contract For Difference)... I compiled it here for all to read rather than answer individually.

CFD is simply an agreement to exchange the difference in value of a particular share between the time at which a contract is opened and the time at which it is closed. It is an arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities.

CFDs are generally versatile trading vehicles, giving you full access to market movements without having to own the underlying instruments. CFPs are fast replacing traditional share dealing as the vehicle of choice for flexible, cost-efficient trading. You can trade shares, forex, stock indices and many other markets on margin. You can also trade a wide range of forex contracts, with spreads starting from as low as just 2 pips, as well as round-the-clock stock indices and a selection of other markets. All under one trading account.

Qn is To LONG or To SHORT?

CFDs are especially powerful in the BEAR markets. With CFDs you can buy or sell at the quoted price, to profit from rising or falling markets. Other methods of shorting shares are often inconvenient and expensive. CFDs can be used to trade an extremely wide range of financial products and this means they offer a way to easily start dealing across a large cross-section of the market. For example, if you have an interest in Singapore and US indexes, the level of Wall Street, and the exchange rate of the US dollar against the euro, you can deal all of these markets with one CFD provider on one account.

The new & flexible way of trading is very similar to normal share dealing in two respects. You deal at the cash price of the share, and pay a commission which is calculated as a percentage of the value of the transaction. Our standard commission rate for Singapore shares is just 0.2% (see Contract Details).

When you open a position, however, you do not have to pay for the full value of the shares. Instead you put up a deposit, from just 10% of the contract value. This means you can trade up to ten times your initial capital.

When you close your position, the difference between your opening contract value and your closing contract value is realised. So just as with buying shares or trading futures, the degree to which you are correct in your CFD trading affects how much you make or lose.

Geared products like CFDs can help you make the most effective use of your investment capital, but it is important to appreciate that the amount you could lose relative to your initial investment is greater for geared products than for non-geared products.