Contract For Differences (CFD) – Chapter 12: Conclusion

As an investment vehicle, CFDs are ideal for short term trading objectives and favored among the professional traders and hedge fund traders. As trading in the traditional equity market becomes costlier, so more and more private investors are finding CFDs trading an attractive alternative. Although financial spread betting is also enjoying a higher growth rate and is a good entry level product, the professional trader in the end will still prefer to trade based on the market price than on the terms of the spread bet provider. Estimates of CFDs trade related transactions now account for more than 25% of all the stock exchange transactions.

The ability of CFD traders to benefit from the bull and bear market also account for it popularity over the traditional equity market. Short selling of stocks in the traditional equity market is generally not available as a trading option for the investors. Furthermore, with CFD trading, there is the opportunity to leverage on trades on margin trading allowing for lower cost of market entry.

Even though CFDs are just financial instruments, they still entitle the holder of the instrument to benefit from certain privileges that are accorded to the typical shareholder. These include the right to dividends, splitting & merging of shareholder capital. No other kind of financial instruments is able to provide such a rich package of benefits for the trader.

Having said that, there are also limitations to CFDs. Legal titles of the underlying assets does not pass on to the holder of the CFDs. As a long term investment vehicle, its cost is becomes substantially higher than the cost of holding the actual underlying assets. On top of these, CFDs are not traded on the regulated market and this means that CFDs providers can arbitrarily close a traders position regardless whether the company has become insolvent or not.

Last but not least, when contrasted with equity trading, the risks of CFDs trading are very much higher and the investors faces potentially higher losses than his initial investment.