When Trading CFD
There are several problems with trading conventional financial instruments. If you like to trade with margin, then stocks are not that exciting as stocks are governed by Regulation T. This restricts margin on any stock transaction to at most two to one leverage. Additionally, if you want to make a bet that a stock goes down, better known as “shorting” a stock, then you have to be able to locate a borrow on the stock first. For thinly traded or heavily shorted names, this can be quite difficult. Finally, it can be difficult to trade foreign stocks due to restrictions on trading and much higher commissions charged by overseas brokerages. You might want to check XFR Financial Limited and what kind of benefits they offer here.
CFDs solve these problems because they are derivatives of the underlying contracts that are not regulated by any exchange. The way it works is that two parties enter into a contract. One agrees to pay the other party the difference between the current price and a price sometime in the future. Essentially one party is making a “long” bet that the stock goes up while another is making a “short” bet that the stock goes down. The hard date in the future is needed because this is a derivative contract that needs to be settled since neither party actually holds the stock.
Generally speaking, market makers will take the other side of any transaction when first executed. They will usually charge a premium or “spread” for the contract, meaning that a person will usually have to have the stock increase of decrease a minimum amount in the direction he bet on in order to break even. Because these instruments are traded over the counter, spreads tend to be higher than when dealing with financial instruments on listed exchanges.
XFR Financial Limited Allows Higher Margin
While spreads are generally higher, one advantage of trading CFD is that brokers like XFR Financial Limited allow traders to trade with much more margin than they could if trading stocks on an exchange. Since there are no regulations governing these products, the amount of leverage offered is up to the broker. Note, that a trader should never use maximum margin levels because that will usually entail a lot of risk. If you have 100 to 1 leverage you can double your money if a stock goes up only 1%; however, you can also lose all of it when it goes the opposite direction. Nonetheless, responsible use of margin in a diversified trading portfolio can help to magnify returns.
Finally, CFDs allow one to trade virtually any liquid instrument no matter what exchange it trades on. CFDs are not limited to stocks. This opens up many possibilities for traders who want to trade a diversified set of markets with XFR Financial Limited. Trading CFD provide the flexibility to be able to trade with world’s markets without being stifled by obscure exchange rules and regulations.