Contracts For Difference

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Strictly named Contracts for Difference, CFD's have become an extremely popular investment alternative to join the vast suite of products now available to the investor.
Caution must be stressed however, because as they say in the larger boardrooms of the world 'there is no such thing as a free lunch'.
With a CFD, an agreement is made to take a position in underlying assets, more often than not being shares in a particular corporation, without actually purchasing those assets.
Only a percentage of the cost is required and this varies from 1% to 30% of that cost.
The difference in the value of the assets is marked to market at the close of trading each day, and appropriated to either the buyer or the seller depending on whose favor it lies.
The intriguing feature of CFD's is that the full cost of the assets, in addition to the initial deposit is not eliminated.
This cost is effectively borrowed, and so the risk remains real to the investor.
The cost of the borrowing is factored into the price paid or received by the investor, and as this price is marked to market each day, some security is offered the other party.
Attraction for CFD's stems from the leverage achieved when purchasing shares for example.
The profit from purchasing shares, even with the attached borrowing cost, and selling them for a profit, represents real returns that would not be possible if the same investment were used to purchase the physical shares.
The difference in yield terms is what captures the attention of so many investors, as CFD's in a favorable transaction can represent a return differing by 100% to that of the physical share ownership using the same amount of capital - without borrowing.
However, it is equally possible to lose the same percentage, and this simple fact appears to elude the minds of numerous individual investors across the globe.
Institutions and brokers that market these products do so quite naturally, in a bid to profit themselves, however what is most apparent now, is that products such as CFD's while external to the physical share market in its derivative form, allowed the institutions to offset each investor trade in parcels released to the physical market, and at the same time allowed the investor to profit from the bull market that saw world stock markets soar continuously for years on end.
In essence they pooled the demand for these affordable products and took their share of profit, while allowing the investors to have the balance.
Due to the fact that most investors bought CFD's as an alternative to buying shares, invariably, they profited with their impressive yields on investment.
However, at all times they were vulnerable to the equally possible loss from these strategies, and particularly in the current financial climate will be well advised to reconsider the value they place on the leverage that CFD's afford.
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