In the context of the investor competition, which started on 15 February and will end on Friday, May 13, we regularly present a trading product. Today: CFD
CFD is an acronym for contract for difference. The product is born in the nineties in Britain, to avoid a tax. financesplus.net It is a contract between two parties: investor-a person who makes an offer, the stock exchange broker. The two parties undertake in a speculation on the direction that an underlying value stream will take. You can sign a contract with a long position (the course will increase) or a short position (the course will drop). The underlying value may be an action, but also a currency, stock index, a commodity or an interest rate.
A CFD is a derivative because the value is derived from the value of another active. The term difference represents the difference in value that the assets between the time where you start the bet and when you turn it off. If you win the bet that the price has moved in the right direction, the broker must pay you gain. If you have failed, in this case, you must pay the loss to your broker and you see the balance of your account decrease.
Bet with a leverage effect
The main feature of a CFD is its leverage effect. You can, with a limited bet, win the increase or decrease of total value. Imagine that you anticipate an increase in the stock of Bekaert. Your CFD broker etoro displays 27.10 and 27.15 euros as courses for sale and courses to the purchase, the price at which he wants to conclude a contract with a short position and a long position. As you go higher, you take a long position. You place a bet on 1000 shares. You can freely determine this quantity. If you bought the shares les options binaires, it would cost you 1000 x 27.15 euros = 27.150 euros (excluding postage). If you purchase a CFD contract with a long position, you work in this case by a margin of position and you must book only a fraction of this amount for your bet.
The type of lever with which you can work depends on the broker. Some allow a margin of 5%, others – such as Lynx – allow 12.5%. If the minimum margin is 5%, you can subscribe this order betting 5% of 27.150 euros, or 1.357,5 euros. This amount is blocked on your account. It is also the maximum amount that you can lose. As soon as the course down 5%, you lose your bet. If the action increases by 10%, you earn in this case 2,715 euros, which represents a gain of 200%.
The great advantage of this product is that you can adopt significant positions in the market with limited means. You can very easily speculate on a move at the drop of an asset, which, in Exchange, is almost exclusively to the scope of institutional investors. CFDs also offer the ability to play very short on the ball. As you adopt positions on almost all of the underlying values, the financial world as a whole becomes your playground. You can taste the world of professionals.
But there are also many disadvantages to CFD, which are high risk products. If prices vary greatly, you very quickly lose the entirety of your bet. You are obliged to follow almost constantly open positions, certainly those with a significant leverage effect. There’s also a counterparty risk. The broker may exaggerate his hand and to no longer be able to meet its payment obligations.
This is not a sinecure to be beneficial long-term with the CFDs. single a trader in ten it would succeed. It is very difficult to consistently beat the market in the short term. More than the margins are narrow – and at least you wager your own money – more than it becomes difficult. Because of the high risk, CFD are not within the reach of the investor ‘good father’. The likelihood is great that you may lose your money.
In Britain, the birthplace of CFD, there are dozens of brokers. Each market maker is determines its offer and its conditions as seems it, as the leverage effect and costs. In Britain, these products focus primarily on British and U.S. equities, as well as on major European values. For a Belgian investor, this is not so interesting. It must also make a transfer of money to a British account number.
In our country, there is that Lynx and Keytrade Pro (only accessible to specialized investors Keytrade Bank platform) which offer CFDs, so the least known WH Selfinvest, and again, only on the most liquid Belgian shares. The Dutch broker DeGiro works already for some time to an offer of CFDs on the Belgian actions, such as alternative to shares listed on Euronext Brussels. The objective is to manufacture of CFDs on been
In our country, there is that Lynx and Keytrade Pro (only accessible to specialized investors Keytrade Bank platform) which offer CFDs, so the least known WH Selfinvest, and again, only on the most liquid Belgian shares. The Dutch broker DeGiro works already for some time to an offer of CFDs on the Belgian actions, such as alternative to shares listed on Euronext Brussels. The objective is to manufacture of CFDs over which he has no leverage. If you want to buy 1000 shares of Bekaert, you should in this case have the total amount on your account. But development takes longer than expected. It seems not so easy to put everything in place.
Costs and taxation
Subscribe to a CFD contract is not free. The broker charges a commission per transaction, which can reach up to 0.10 or 0.20%. On a CFD, it has no tax on the stock or tax on speculation, because the product is not listed on the stock exchange. The broker shows the course and endorsed the paris. It is y no other intermediary involved.
The introduction of the tax on speculation has greatly promoted the popularity of CFD. But barter actions for CFD to avoid this tax is not a good idea. These are two totally different products.