CFD stands for Contract For Difference. It is a contact between two parties in which the seller will pay to the buyer the difference of the current asset value and its value at contract time. This is based on a positive difference. However, if the difference is negative, the buyer pays the seller. This allows traders to take advantage of prices moving up (also known as long positions) or moving down (short positions) of the underlying financial instrument. In essence it is trading of various derivatives without actual ownership. CFD trading is a component of the day trading market.
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Scalping is a commonly used technique. It simply means that traders hold positions for a very limited time. Most day traders exit positions before the market closes in order to avoid unmanageable risks. Price gaps can occur between one day’s close and the next day’s opening.
Commonly used terminology in day trading includes “margin trading.” This basically means that they “borrow” money to trade. This can lead to huge profits, but also major losses. Buying on margin is very common. The interest rate is based on a broker’s call.
Originally when stocks were traded a trader would contact a stockbroker who in turn relayed the order to a specialist on the floor. The specialist then got hold of whoever was interested in the order, process it and write the tickets. This effectively transferred the stock. Brokerage commissions were set at 1% However, in 1975 it changed. This allowed brokerages to charge commission fees of their own. The lower commission fees lead to much better and more competition. It was also one of the first moves to allow the start of day trading. Electronic ownership transfer was the last step that made today’s online day trading possible.
A very important necessity for day traders is market data. Real data feeds are available. These come at a very low cost. Usually brokers require traders to make a certain volume of trades each day in order to cover the costs of these data feeds. The requirements aren’t high. Even a moderately active day trader can expect to meet the requirements. By meeting these requirements the data feeds essentially becomes free. More advanced data feeds are also bought some of the more experienced traders.Some day traders also buy complicated analysis and charting software. These systems vary in price, from a few cents to hundreds of dollars per month.
Credited to Brian Keelan and Jon Wood, CFD’s were developed in early 1990 in London as an equity swap of sorts. They were traded on margin. Originally used by hedge funds and institutional traders to hedge their exposure on the London Stock Exchange, they were made available to retail traders in the late 1990’s. CFD’s were further popularized by a number of UK companies. Around 2000 people realized that the benefit of CFD’s was the ability to leverage any underlying instrument. This kick-started the growth of CFD usage. CFD providers quickly expanded their LSE offering to include others.
CFD’s can currently be traded in United Kingdom, Hong Kong, The Netherlands, Poland, Portugal, Romania, Germany, Switzerland, Italy, Singapore, South Africa, Australia, Canada, New Zealand, Sweden, Norway, France, Ireland, Japan, Austria and Spain.
CFD trading carries a risk of capital loss.