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Unformatted text preview: What is a CFD? A CFD (Contract for Difference) is an agreement between a buyer and a seller to exchange the difference in value of a particular instrument between when the contract is opened and when it is closed. The difference is determined by reference to an underlying a share, index, FX rate or commodity and the period over which the CFD is held. CFDs are leveraged instruments. This means that you are fully exposed to price movements of the underlying instrument without having to pay the full price of that instrument. Leverage, however, usually involves more risk than a direct investment in the underlying. It is therefore important to understand both the upside benefits as well as the downside risks. Advantages of trading CFDs CFD related trading and hedging is one of the fastest growing areas in the Australian and European derivatives markets. This popularity has arisen from the following main features: Leverage: CFDs enable you to obtain full exposure to a share or commodity for a fraction of the price of buying the underlying. CFDs require only a small Initial Margin to secure a trade. The ability to go short: CFDs allow traders to take advantage of falls in prices. This means that traders can profit when prices are going down, not just up. CFDs are, thus, an excellent trading tool. Simplicity Non-expiry: CFDs do not have an expiry. They are perpetual in nature. The only way to close a position is to trade the opposite side of the position. The CFD mirrors the price of the underlying: Unlike other forms of derivatives (i.e. options and futures), cashflows such as carry costs and dividends are not reflected in the price of a CFD. Instead, cashflows are paid whilst the position is open, allowing CFD prices to track the underlying instrument rather than trade at a discount or premium, as can be the case in other forms of derivatives. A fundamentally better alternative ASX CFDs combine the main features of currently available CFDs with the unique attributes of exchange traded markets. These include: Transparency All prices and market depth are fully transparent in the ASX CFD order book. Each traders order becomes an integral part of the price discovery process. Importantly, while prices and market depth are transparent, your identity remains anonymous. This minimises market impact costs (especially those related to others identifying your trading patterns and trading ahead of you). All trades are executed on a strict price/time priority. Price/time priority means the first person to enter the best price is traded against first. This results in everyone in the central market order book being treated fairly and consistently....
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