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By: Alexandra Gilmore.   
Date Added : July 2, 2011 Views : 587

A CFD is a contract of difference. It is a contract between two parties, normally between a buyer and a seller which provides that the buyer will pay the seller the difference between the current value of an asset and its value at the time the contract is finalized. Simply put it is an agreement to exchange the difference in value of a particular financial instrument between the time at which the contract is opened and the time at which the same contract is closed. They offer greater flexibility than normal share trading as an investor can go long or short on shares, forex and other financial derivatives. It is a form of trading on the futures of stocks, forex and other financial instrument that can be invested in.

An example of a CFD is when investors speculate on the share price movement, without the need of ownership of the underlying shares. If the price is negative then the seller pays the buyer instead. The advantage of using this kind of contract is that you do not have to pay upfront the whole amount for the shares you want to purchase, you can set up an account where you put down the deposit or ‘margin’ of the underlying contract value. This will open up a whole new world of financial investing for you while ensuring maximum gain for your investment.

CFD is a flexible alternative to conventional trading. Trading can be carried out through secure online platforms offered by various providers. There are award winning platforms which an investor can gain access to from the various CFD providers. To start trading in CFDs, one needs to make an opening trade on a particular instrument preferably through the help of an established CFD provider. This will create a ‘position’ in the particular instrument. There is no particular expiry date so the position is closed once the investor opts to liquidate his or her account.

There are various ways to trade in CFD. One of the ways is over the counter trading where an investor will go to the provider and set up a CFD account and the other way is online trading. The suggested browser based platform for online trading CFDs is the PureDeal platform. It gives an investor the freedom to trade on a large variety of markets around the clock all in one account. You can also use the PureDeal platform on a variety of mobile devices such as the iPhone, Android Smartphones, Blackberry and other handsets.

Contracts of difference are traded between individual traders and CFD providers. There are no set of customary rules in contract terms for CFDs and each CFD provider can specify their own. An investor who intends to invest in CFDs should invest only an amount he is comfortable with as CFDs are high risk investment instruments. This is because there are leverage precuts as the initial deposit gives you large exposure that you would otherwise not get from buying the instrument directly. This is the key advantage of CFD trading as leverage allows an investor to profit in a market without having to fully invest himself in a position. An interested investor should only work with a renowned company who will advice him on the nature of the investment and the risks involved and also maximize on the return for the investment that was undertaken.

Alexandra Gilmore is the author of this article on CFD. Find more information on CFD Trading here.

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