If you trade in contracts-for-difference or CFDs in short, you must have noticed that they are at present going through a period of change. Financial trading regulatory controls have in the recent past tightened further as regulators continue to clear out non-compliant or dishonest brokers from the market. Tighter CFD policies are being implemented introduced and implemented by regulators across the globe. As a trader, you need to have an ear to the ground about changes in the market especially if you plan to venture into CFDs.
What are CFDs?
A contract-for-difference is a new type of trading that has gained popularity due to the many advantages it has over the conventional stock exchange market. CFD trading allows you to speculate on climbing or dropping prices of tradable commodities and instruments including indices, shares, treasuries, and currency pairs in Forex as well as commodities such as gas, oil, silver, gold, coffee, wheat, and cotton among many others. It is an over-the-counter (OTC) trading in a decentralized market that can be done from any location worldwide. What makes it different from the traditional centralized exchange is the fact that in CFD you don’t own actual physical stock but instead trade on price differences that occur between the time you get in and when you get out.
Advantages of CFDs
There are several advantages you get when trading CFDs compared to the conventional stock exchange trade. For instance, with CFDs, you have the option of going short or long. You can go long by buying and then selling assets or instruments when prices are rising or go short by selling and then buying assets when prices are going down. Short positions, also called hedging, gives traders a safeguard for their long positions.
Another advantage of CFDs is the ease of trading. You don’t need stamp duty because the CFD is an arrangement you have with your broker. One of the key benefits of CFD trading is leverage. You only need a small percentage of the entire value of the trade you intend to open to begin trading then leverage on your gains. The low starting amount, known as a margin, is one the reasons why many traders find CFDs quite attractive. However, just as leverage enables gains, it comes with a risk of making losses bigger than your margin.
CFD trading costs are comparatively lower since you only pay for the spread, which is the actual difference between buying and selling prices. Most CFD trading brokers provide competitive spreads and margin rates. CFDs are also very liquid since they don’t have an expiry date. Unlike stock exchange, you can trade CFDs 24 hours any day from Sunday to Friday.
Tighter CFD Policies
The tightening of CFD trading policies is not a new phenomenon in the market. In November last year, the Cyprus Securities and Exchange Commission, known in short as CySEC, sent a circular that prohibited investment firms in Cyprus from enticing retail clients with bonuses and incentives. The Financial Conduct Authority in the UK has also proposed changes in CFD trading to ensure that retail clients are fully aware of CFD products before trading. The enhanced regulations should however not be seen as a deterrence to brokers but as a way of getting rid of non-compliant brokers from a more regulated market.