For those who are new to CFD trading, there is no doubt that the term can be bewildering. Basically, in financial terms, a forward contract for the difference is simply a contract involving two parties, usually defined as “buyer” and seller, stipulating that at contract termination the buyer will compensate the seller for the difference in value between the seller’s asset at present and its fair market value at the date of termination.

Essentially, CFDs represent naked short selling – the selling of CFDs without any underlying assets to offset the loss. The benefits of this arrangement are clear, as it is only when the market rises that a real estate investor can sell short his or her CFD positions and take advantage of the rise in value.

One of the many advantages of trading CFDs is that they allow for extremely flexible trading hours, allowing speculators to either speculate on price changes or trade long when market volatility is low and cover for short positions when market volatility is high.

This is not to say, however, that CFD trading is entirely void of risks. Any venture that involves investment risk must always be hedged against and, where possible, avoided altogether. In this respect, CFDs are particularly suitable for speculators who are interested in either short-term or medium-term investment opportunities, as they can act as protective tools against fluctuating market prices.

However, one important point of consideration with CFD trading south africa is that they are not covered by insurance protection. This is not so with options or swaps, which are both forms of CFD trading that are covered by insurance against the risk of loss. While this may not be a significant factor for most CFD speculators, it could certainly be for other investors who are more interested in investment returns.

As it stands, the lack of insurance coverage does represent a significant disadvantage, but this is offset by the increased flexibility offered by the use of CFDs. CFDs allow for flexible trading hours, which may be combined with different trading strategies, and offer greater leverage than most derivative instruments at the same time.

Another major advantage that can be associated with CFD trading is the fact that they offer the convenience of allowing the investor to “go long” or “go short”. With a CFD, an investor can speculate on the movement of an underlying asset either by purchasing or selling the contract at a precise price and a precise date.

In doing so, CFDs allow for speculation on movements in the underlying asset without ever actually buying or selling tangible assets. In comparison, trading with options or swaps requires the physical transfer of some sort of asset to enable trading, and as a result, there is an added cost for any such activity.

Going long, or going short, on CFDs can mean large gains or losses depending on how the market fluctuates between the time you place the order and when you execute the trade.

CFDs also allow for a quick profit exit, which can be useful when you are anticipating a short position reversal (also known as a flip). When you write a CFD purchase order, you promise to buy at the strike price and sell at the break-even price, giving you instant access to your cash position.