The electronic trading market for the derivatives of foreign exchange markets, known as CFD trading, was initially developed by the Chicago Board of Options Exchange. However, the New York Stock Exchange (NYSE) was then permitted to trade in this market. In fact, traders can trade in the United States market through the NYSE and there are also similar trading facilities in the Singapore and London markets.
CFD stands for Contract for Difference. This trading concept has its roots in the philosophy of currency trading. This concept is quite different from the conventional concept of trading because of its limited risks and its benefits.
A contract for difference is a contract between two parties. The buyer and the seller agree to exchange one commodity for another at a fixed price, or rate, over a given period of time. Each party is required to give an asset as security. The contracts are normally executed via the forex market. This means that the investors or parties involved can trade their contracts via online forex brokers or through the traditional means of telephone calls.
The CFD market is highly liquid and most orders for a contract are executed in less than five minutes. This allows for smooth transactions, provided that the dealer complies with the regulatory requirements.
There are two types of CFDs. These are the spot contracts and the forward contracts. The former are an option, whereas the latter are a futures contract.
In spot contracts, the buyer transfers the asset in exchange for the price agreed upon in the contract. The money received is known as margin and is used to satisfy the contract amount. Traders may not give more than the initial margin requirement and the margin requirement cannot be changed.
On the other hand, the forward contracts are based on the forex market. This means that traders can use the assets that they hold as security. The contract is between the seller and the buyer.
The seller puts up the asset at a specific price and offers to sell it at another price if the price is at the lowest level. The buyer will buy the asset and offer to sell it at the same price at the end of the period. The broker exchanges the asset for the buyer at the price agreed upon in the contract.
However, the buyer should be aware that the seller can withdraw the asset before the expiry of the contract. In this way, it ensures that the asset is not fully sold or taken to a margin.
The trader can deposit the money at the broker’s desk and use the assets to pay for the contract. Traders are able to use an account known as a CFD account and there are various terms of service which the buyer must observe.
Different accounts have different terms of service. It is recommended that buyers research the market before entering into a contract. There are also brokers who provide their services online.
While it is very advantageous to have a CFD broker, traders should also be aware of the risks associated with trading. They should be knowledgeable about the CFD trading market and should always check the CFD market to find out the latest information on this market.