The latest promotion launched by star newcomer broker ForexTime (FXTM) runs from a few days ago until the end of May 2014 and entails the commission free trading of CFDs on shares, ETFs and commodity futures, from an asset list that is long and varied and includes the likes of Coka-Cola, eBay and Google.
Subject to term and conditions, which are designed to prevent the misuse of the promotion by anyone, through this commission-free trading, FTXM adds another step on its way to ensuring that its clients receive the maximum value for their money and enjoy the opportunity to trade with the least possible costs.
This promotion gives us the reason to highlight the essential facts regarding CFDs, as these are less common financial instruments that have not gained enough of our attention in the past. A CFD, which stands for contract for difference, is simply-put an agreement between the investor and the CFD provider, who agree to pay each other the change in the price of an underlying asset. Depending on which way the price moves, one party pays the other the difference from the time the contract was agreed to the point where it ends.
Essentially, trading in CFDs entails the investor assuming the opposing view to that assumed by the insurer, since the investor speculates that an asset price will either rise, and he therefore buys (‘long’ position), or fall, and he therefore sells (‘short’ position).
Because through CFDs you are not buying the asset as such, but only agree to pay up or receive depending on how its price moves, CFDs are exempted from stamp duty payment. Moreover, through CFDs one can make big gains, or sustain large losses respectively, since you are only required to put down a small margin, as a deposit for the trade, and therefore a small move in the price can lead to a huge impact on the amount of money you commit.
To explain things further let’s take into account that a CFD is a way of buying shares using a short-term loan, on which interest is paid on a daily basis. When you sell a CFD, you use the proceeds of the sale to pay off the initial loan and then pocket or pay the difference accordingly, but because most of the funds you are using are borrowed your associated gains or losses are magnified respectively.
It is important to bear in mind that besides the price of the actual asset, the interest on the margin loan that you undertake is debited or credited to your account on a daily basis depending on whether you are going long or short and it is calculated according to the terms dictated by your CFD provider.
It's also worth remembering that most CFD brokers charge a commission that is not based on initial deposit you make, but instead on the underlying consideration on the shares. This could mean that you are not only paying interest on the margin loan amount, but you could be called to pay commission on this amount as well.
Generally speaking CFDs are more complicated and potentially more risky than other investment vehicles. However, with commission free CFD trading, such as the one offered by FXTM through their latest promotion, CFDs become a more attractive option and perhaps they are worth a shot at, especially since they could prove a useful tool in the hands of traders that are accustomed to short-term trading, since they enable them to diversify their portfolio to a truly unlimited range of companies, without the pre-requisite of having a huge amount of available capital to invest. So, what do you think….is it time, you traded CFDs at ForexTime??
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.