CFDs are 'contacts for difference', and were originally developed on the London Stock Exchange in the early 1990s. They were introduced initially to hedge funds and institutional investors so as to decrease their exposure to share price movements. They proved so popular that they were introduced to retail investors in the late 1990s on the London Stock Exchange. Since then, a number of countries have introduced the concept on their stock exchanges, the notable exception being the United States.
The whole concept of CFDs is similar to options, in that they are a leveraged instrument. In short, that means that the owner of a CFD is exposed to price movements of the underlying instrument without having to actually own the underlying instrument. This has advantages in speculating over short term price differentials and fluctuations. Options are similar in that regard, however it is noteable that there is no time decay with CFDs as the contract does not have a time factor - the contract remains in place until one position or another is exercised.
This has a remarkable effect on the potential to turn fluctuations in the stock market into real profits without having to actually purchase the stock which is the underlying security for the contract. As CFDs are leveraged instruments, it is natural that there is some inherent risk associated with purchasing such contracts. However CFDs allow you to limit that risk to a level you deem acceptable. As part of the contract you can stipulate a specific share price you wish to sell at for either a loss or a profit.
For example, if I purchase a CFD on XYZ company which is currently trading at $10.00. I stipulate that if the stock drops to $9.50 I want to sell and limit my losses. I believe that the stock will actually rise, so set a further limit of $11.00 at which point I want to sell. In effect I have set acceptable limits of losses and profits, defining my risk margin. I urge you to seek more information on CFDs and stock market trading, educate yourself in this remarkable investment opportunity.
CFDs are the fastest growing product on the ASX, and allow for little investment with the potential for good short term percentage gains. This is perfect for the 'backyard' investor, and a real opportunity to derive some real, ongoing income from the stock market, no matter where you arein the world.
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