Docstoc

The Advantages Of Using CFD As An Instrument

Document Sample
The Advantages Of Using CFD As An Instrument Powered By Docstoc
					CFD are instruments that can be used to take positions in stocks. Now, the question
arises if they are the same things as stocks why use them at all, why not use the real
thing itself?
  The answer to this is pretty simple. Taking positions in the market usually can be
done through two ways. Either you should have all the money upfront with you, or
you will have to borrow the money from someone and will have to use the shares as
collateral.
  CFD trading is an efficient way of accomplishing the second task that is also the
darling of many traders. This type of trading helps you take positions in multiples of
what you have with you. This basically means that for every $10 you have, you could
take a position up to $100. So if the stock went up by 10%, you would gain 100%!
  But that is your gross margin. CFD helps by cutting your trading expenses. This
means that whenever you have to hold these positions overnight, you have to borrow
money. Also commission (brokerage) is payable on each buy/sell transaction and is a
percentage of the total amount.
  CFD trading allows you to borrow cheaper as compared to what your competitors
might be able to get in the market. Also the commissions charged are considerably
lower. Also, there is no minimum amount that needs to be kept in the account if you
are not in an active trade.
  Bringing costs down brings you more maneuverability. An average trader will get
2-3 trades right on every 10 that he does. With CFD your transaction costs reduce and
you can perform 12 or 13 trades at the cost of 10 direct trades.
  Now the more you trade, the more likely you are to make more profits. So costs cut
add to profit disproportionately. It gives you more freedom to cut your losses more
often and undo the excess baggage that brings down your overall profitability.
  CFDs help especially when you trading with the momentum. This entire means is
that you notice that the stock is on an uptick and you expect it to remain so for some
time at least. You can quickly enter and exit the trade with only 10% upfront payment.
In a matter of minutes, you might have made percentage returns that are enviable if
you look at deposit interest rates.
  Also the accounts allow you to place specific orders. So you could limit your loss by
setting an order that sells it the moment it reaches a particular price. You do not have
to be manually present to execute the order.
  CFD trading is a mix of financial leverage and technical superiority brought to the
doorstep of the retail lender. Prior to CFDs, such trading was the prerogative of
wealthy individuals and big investment banks. There was very little option available
to a retail investor and the transaction costs deterred them from entering into such
trades.
  Like any other instruments, CFD has its own pros and cons. It is suitable for
investors who can predict the movement of the market carefully and want to gain
from it. A more risk-adversive investor might not want the leverage but then the return
is also just about average. www.igmarkets.com.sg is a website where you can find out
more about CFD for yourself. Its successful implementation can lead to major gains
on your CFD trading portfolio.

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:1
posted:2/22/2011
language:English
pages:2