CFD Prophets

CFD trading from CFD Prophets. Learn to trade CFDs with Share Select, it can lead to fat profits.

Used extensively in the UK and Australia, Contracts for difference (CFDs) are an over the counter (OTC) derivative. This means that they are not exchange regulated and the contract is between yourself (the trader) and the provider. CFD Trading offers nearly all the benefits of trading shares without having to physically own them. CFDs mirror the performance of a share. Contracts for difference are traded on margin, and the profit/loss is determined by the difference between the buy and the sell price. Because contracts for difference trade on margin, investors only need a small proportion of the total value of a position to trade.

A CFD will also mirror any corporate actions that take place. The owner of a share CFD will receive cash dividends and participate in stock splits. Day traders, in particular, love CFDs as it allows them to leverage into “shares” for little upfront cost. Moreover, CFDs also allow investors to make money out of a falling market, as well as a rising market. In a falling market, you can sell the share you don’t own and buy back when it has slipped in price value enough for you to pocket the difference and make a profit.

On the downside.

The deposit is not a down payment for the balance of the trade, but rather a margin held by the provider as protection against any possible losses. This means that an investor may receive a margin call demanding more money if they have bought into the stock thinking it was heading up and the share price falls. As such, CFDs may not be suitable for “buy and forget” trading or long-term positions. Given this a trader should use stop losses; activated by the CFD Provider (broker) at a % move in the underlying share price against the suggestion. This should (in theory) negate any margin call demands.

What are they:
Contracts for Difference (CFD) is simply a synthetic equity product traded on margin. By trading a CFD with another party, the trader transacts does not in shares per se but in share price movements over a fixed period. The return is generated by the difference between the opening and closing prices of a specific share.

Risk:
CFDs are promoted as an ideal short-term trading tool. However there are risks. Potential traders need fully to appreciate the risks and costs involved. Because profits and losses are based on the full transaction value they can be significantly larger than the initial margin required to establish the trade. For example a trader going long $100,000 of a share that has a collateral base of ten percent (10 times leverage) will only be required to place an initial margin of $10,000. A move of 10% in the share price will mean a 100% return or loss on the initial capital.

Stop Loss Vs Guaranteed Stop Loss (GSL)
A stop loss order allows the trader to set a price which if reached will automatically trigger a sell order (for long positions) or buy order (for short positions) to close their current position. With a simple stop loss if the share or index breaches the set stop loss then the order will be executed at the next available price at the time of dealing. This may mean the order is executed at less than the stop loss price in the case of a long position or more than the stop loss price in the case of a short position.
However, the use of a guaranteed stop loss overcomes this. As it suggests this is a stop loss order that is guaranteed to be executed at the price the trader specifies, even if the price of the underlying share or index makes a sudden movement and never actually trades at the price that specified, the position will still be closed at the chosen price. This may not be the case with a simple stop loss.

Risk Profile:
Every traders risk profile is different as is every stocks risk profile. The more speculative the stock, the higher the inherent risk associated. As such, those CFD traders with a more aggressive risk profile trading these more risk-prone shares suggests a GSL is mandatory.