‘Contracts for Difference’ or CFD trading is the buzzword among traders today. It has gone a long way from the time it was conceptualized and used by Brian Keelan, a former Swiss Bank and SG Warburg corporate financier in 1994 in his hostile takeover bid of Trafalgar House in London. The concept has since been applied to various corporate situations and has undergone several innovations and permutations. It now has become a vital investment instrument with which investors big or small is able to take advantage of every trading opportunity in not just one but a basket of varied investment instruments from stocks to bonds, to commodities, to forex, and even market indices.
This is made possible by the fact that CFD trading is done through a margin trading system that allows traders to buy and sell using very little capital. It is a boon to small traders who have very little capital to invest. With CFD, the high leverage used would be the featured benefit offered by online forex and commodity futures trading have been applied to practically all the tradable financial instruments.
To the more affluent investors, this means an opportunity to diversify their investment portfolio utilizing just a small portion of their investible capital. Diversifying an investment portfolio has always been a tough challenge to investors since it entails the distribution of substantial amounts of capital on a varied list of investment opportunities. Often, investible capital is spread too thinly on high yield instruments or sometimes-earning opportunities are missed because the investible capital is still tied up somewhere else.
With CFD trading, investors will be able to diversify and include whatever instrument they fancy without putting a stress on their money management objectives and strategies. The low margin required to buy or sell CFDs allows them to park their capital wherever and whenever an earning opportunity presents itself. Every experienced trader knows better not to put all his eggs in one basket but his efforts to diversify is always hampered by limited capital. Normally, once the capital has been parked in a particular basket of investment opportunities, his hands get tied down too. Before he can take advantage of emerging opportunities that were excluded from his portfolio, he has to free some of his already invested capital. Thus, he often fails to jump in and join the bandwagon to profits.
With the small capital requirement of CFDs, traders will be able to trade more choices and take every opportunity that may come along. With CFDs, the trader can go in and out of the market at any given time, which means he’d be able to make adjustments in his investment portfolio anytime it becomes necessary or ride the bull in style by stacking up on instruments that happen to be on a rampage.
CFD can also be a potent tool for hedging whatever risks they face in whatever instrument he may have parked his money on. For example, if he has bought a currency pair and is currently losing money, he may opt to sell the Forex CFD equivalent of the same currency pair and thus preserve the value of his current holdings.