The Explosive Growth of Contracts for Differences
Also known as CDFs, contracts for differences involve an agreement between a CDF broker and an investor to exchange the difference in the value of a financial product between the time the Contract begins and ends. The financial products primarily include derivatives and securities. Only advanced traders utilize CDFs since it is an advanced trading strategy without delivering physical securities or goods. A contract for different investors does not actually own the underlying asset. Instead, they receive income depending on the price changes of the asset. An investor can bet on whether the price of an asset will fall or rise using CDFs. Therefore, the betting strategy involves either a downward or an upward shift in price.
Does the United States Allow Contracts for Differences Trade?
No, the US does not permit CDFs in its territory. However, other countries allow CDFs in over-the-counter markets. These countries include South Africa, Spain, France, Singapore, the United Kingdom, Italy, Sweden, Norway, Denmark, New Zealand, Canada, Germany, Switzerland, and Belgium. Also, Australia recently permitted CDF trading. However, the Australian Securities and Investments Commission (ASIC) has announced some changes in the distribution and issue of CDFs to retail clients. The product intervention order took effect on 29th March 2021. This commission aims to strengthen consumer protections by decreasing the Contract for differences in leverage offered to retail clients. Also, it targets CDF sales practices and product features that magnify retail clients' CDF losses.
Explosive Growth of CDFs
CDFs were introduced in the late 1990s when this online trading concept was taken off-exchange to the OTC market. This move concurred with the introduction of online retail trading following the mass internet access to our homes.
The explosive growth of contracts for differences was realized when people discovered that the CDF concept applied to a wide range of instruments. This included Forex, oil, and gold. In fact, CFD can be applied to any instrument where participants wish to trade the fall or rise of an underlying price without the inconvenience of physical delivery.
Benefits of Trading CDFs
Global Market Access from One Platform
With the massive technological developments, most CDF brokers now offer products in all the world’s major markets. Thus, this enables around-the-clock access.
As a Contract for Differences trader, you can trade CDFs on a wide range of global markets.
Increased Leverage
Generally, CDFs offer increased leverage compared to traditional trading. Standard leverage is now subject to relation in the CDF market. Initially, the maintenance margin was as low as 2%, but it was changed to the current 3%. Reduced margin requirements lead to higher potential returns and less capital outlay for traders. Remember that increased leverage could also mean increased trader losses.
Professional Execution with no Fees
Contract for Differences brokers provide numerous of the same order types as traditional brokers. These include contingent orders, limits, and stops. But, some brokers might charge recoup costs or a fee for guaranteed stops.
Numerous Trading Opportunities
Currently, brokers facilitate sector, currency, index, stock, commodity, and treasury CDFs. Therefore, this diversity allows traders interested in diverse financial vehicles to trade Contracts for differences as an alternative to exchanges.
Does Not Have Day Trading Requirements
Some markets limit the maximum number of day trades that can be made from certain accounts. On the other hand, others require a specific minimum amount of capital to trade daily. The good news is that the CDF market is not restricted in any way, and all traders can use their accounts to trade as they wish.
No Borrowing Stock or Shorting Rules
Some markets have rules requiring a trader to borrow the instrument before selling short or prohibiting shorting. Others will have different margin requirements for long and short positions. This is not the case with CDFs, as they can be shortened anytime. Also, one does not necessarily have to borrow costs since the trader does not actually own the underlying asset.