Jump to navigation Jump to search «CFDs» redirects here. They are often used to speculate on markets. A CFD is a tool of leverage with its own potential profits ig forex swap rates losses.
It allows an investor to enter the global trading market without directly dealing with shares, indices, commodities or currency pairs. CFDs were originally developed in the early 1990s in London as a type of equity swap that was traded on margin. They were initially used by hedge funds and institutional traders to cost-effectively hedge their exposure to stocks on the London Stock Exchange, mainly because they required only a small margin. Moreover, since no physical shares changed hands, it also avoided the stamp duty in the United Kingdom. In the late 1990s, CFDs were introduced to retail traders. They were popularized by a number of UK companies, characterized by innovative online trading platforms that made it easy to see live prices and trade in real time.
Around 2001, a number of the CFD providers realized that CFDs had the same economic effect as financial spread betting in the UK except that spread betting profits were exempt from Capital Gains Tax. Most CFD providers launched financial spread betting operations in parallel to their CFD offering. CFD providers then started to expand to overseas markets, starting with Australia in July 2002 by IG Markets and CMC Markets. CFDs have since been introduced into a number of other countries. As a result, a small percentage of CFDs were traded through the Australian exchange during this period. The advantages and disadvantages of having an exchange traded CFD were similar for most financial products and meant reducing counterparty risk and increasing transparency but costs were higher.
The disadvantages of the ASX exchange traded CFDs and lack of liquidity meant that most Australian traders opted for over-the-counter CFD providers. CFDs to avoid them being used in insider information cases. Clearnet in partnership with Cantor Fitzgerald, ING Bank and Commerzbank launched centrally cleared CFDs in line with the EU financial regulators’ stated aim of increasing the proportion of cleared OTC contracts. This requires generators to pay money back when wholesale electricity prices are higher than the strike price, and provides financial support when the wholesale electricity prices are lower.
The main risk is market risk, as contract for difference trading is designed to pay the difference between the opening price and the closing price of the underlying asset. CFDs are traded on margin, and the leveraging effect of this increases the risk significantly. If prices move against an open CFD position, additional variation margin is required to maintain the margin level. The CFD providers may call upon the party to deposit additional sums to cover this, in what is known as a margin call. In fast moving markets, margin calls may be at short notice. Counterparty risk is associated with the financial stability or solvency of the counterparty to a contract. This section possibly contains original research.