Contracts For Difference (CFDs) are becoming an increasingly popular addition to many traders’ portfolios. One of the reasons for this is because CFDs are margined products, which means you pay a small initial deposit (margin) and that allows you to take a larger position than you would be able to in say traditional forex trading.
Trading CFDs can help you profit from falling (going short) and rising (going long) markets.
A CFD is simply an agreement to exchange the difference in value of a financial instrument between the time at which it is opened and the time at which it is closed. Your profit or loss is determined by the difference between the price you buy at to the price you sell at, multiplied by the amount of contracts you hold of course. From shares to forex to commodities the range of CFDs you can trade is expansive.
Let’s take a look at forex and a recent example.
Forex trading, or Currency Trading is the most popular and accessible market to trade on in the world.
Forex CFD trading is simple, if you think the first currency in the pair will strengthen you ‘buy’ and if you think it likely to weaken you ‘sell’. Due to the sheer liquidity of forex markets, they are the most responsive to shifts in sentiment in the world.
The actual fear of what might happened sometimes has a greater influence than the actual event itself.
Here’s a recent example.
GBP/USD
On Monday May 10 the pound started the day relatively strong against the dollar, but the day would turn into one of the most turbulent days in British political history. Analysts concluded that, against the back drop of political turmoil a couple of events had bolstered the pound.
The $975 billion support package agreed by the EU and the IMF to ensure that the troubles in Greece wouldn’t spread throughout the eurozone had a positive affect on the pound. Meanwhile the Bank of England announced no change in the key interest rate and that the asset purchase scheme will continue.
The latter would have calmed traders, reminding them that not all key monetary policy decisions in the UK are decided by the government.
Sterling rose to be worth 1.502 dollars at one point. When the UK’s PM Gordon Brown announced his future plan to step down as the leader of the Labour party things changed, and quickly. Certain commentators argued that this was evidence that a pact between Labour and the Liberal Democrats was becoming a distinct possibility, and many not only fear that such a coalition would be short-lived but also that the tough measures that are required to cut the UK’s budget deficit would not be carried out.
Most agreed that the process for any two parties to agree to form a stable government that is in the best interests of the UK public will be a difficult one.Sterling would fall back to trade around $1.485 as currency traders voted with their fears. It will be interesting to watch what happens to sterling and the UK as the political landscape continues to shift around.
Remember that CFDs are a leveraged product and can result in losses that exceed your initial deposit. Trading CFDs may not be suitable for everyone, so please ensure that you fully understand the risks involved.
