Contracts for Difference, CFD, offers traders enhanced trading leverage, flexibility and opportunities across a wide range of
financial products, all in a single platform. Be aware of the following points before you decide whether it's for you:
Prices quoted by the CFD brokers on their platforms
are based on their best efforts to track the real underlying instrument - there can be discrepancies, especially for instruments that are
traded Over-the-Counter (OTC) during periods of market volatility. It is in
each CFD broker’s interest to ensure that these discrepancies are minimal and
infrequent as such discrepancies erode the trader’s confidence in the fidelity
and accuracy of the CFD broker’s price tracking. Such discrepancies affect day
traders who are scalping or doing intra-day trades. End-of-Day (EOD) traders
are generally less affected on a longer time frame, as the CFD brokers would
have sufficient time to eliminate any price gaps.
Financing Cost - CFD is more suited for traders adopting short to mid term swing or momentum trading strategies than for investors who adopt a long term “buy and hold” strategy as CFD brokers impose a financing cost on the contract value.
Depending on the trade direction, a trader can incur or enjoy interest on the
contract value while the contract is still “open”. This interest is calculated
daily and is dependent on the size of the contract. The lower the margin
required to “open” the contract, the less money is required by the trader to
initiate the contract. The rest of the contract is deemed to be “borrowed’ from
the CFD broker. Thus, a lower margin trade typically incurs a higher financing
cost. Typically, due to the leverage effect, this financing cost is relatively
insignificant if a profit is realised eventually.
Trading against the non DMA CFD broker – As Direct Market Access (DMA) are only for stocks, this means that the rest of the instruments offered by the CFD broker are traded on a market making basis. These non-Direct Market Access (DMA) CFD brokers are also known as market makers. Non DMA CFD brokers do not publish the same price as that on the exchange. The trader's orders are not sent to an exchange, but to the broker's trading desk, resulting in frequent re-quotes or slow execution. When the trader takes a long position with a market maker CFD broker and is profitable, he is earning profits from the CFD broker. The trader is in essence trading
against the broker, with the price and trade execution decided by the CFD broker. This usually does not affect EOD traders as much as it
affects day traders.
