• Home ::
• Education ::
• Related Markets ::
• Introduction to Contracts for Difference Trading

• Send
• Print
• Add To
• Rss

Introduction to Contracts for Difference Trading

Wed, May 16 2007, 09:32 GMT
by Global Trader Team

Global Trader

What Are Contracts For Difference?

Contracts for Difference (CFDs) differ from traditional cash-traded instruments (such as stocks, bonds, commodities and currencies) in that they do not confer ownership of the underlying asset. With CFDs you are buying the price movement in the stock (or bond, currency, commodity, etc.). You never take ownership of the underlying asset.

This takes away a lot of the headaches of stock ownership, such as script custody and tracking dividend payments. This also makes CFDs perfect for hedging or gearing up a portfolio where ownership of the underlying asset is neither desirable nor relevant.

CFDs are margin-traded instruments, so fund managers can buy exposure to market movements using only a fraction of the capital required in the cash market. The ability to "short sell" without having to execute script borrowing allows fund managers to hedge against market downturns with great ease and at relatively little cost. There are no laborious script borrowing procedures to administer.

CFDs allow fund managers to hedge portfolios more efficiently than through traditional means, such as futures. There are no costs other than a small cost built into the CFD price together with a small funding charge.

Finally, with CFDs there is no MST. This substantial costs is avoided since the CFD trader never actually purchases the underlying instrument. This explains why so many UK fund managers are using CFDs as an indispensable part of their investment strategies.

Investors can trade dozens of different instruments, from shares to commodities, currencies, bonds and indices. They can go long just as easily as going short. Unlike warrants which are subject to time decay and other price distortions, CFDs track the movement in the underlying asset price in a predictable way.

Why Institutional Investors Are Turning To Contracts For Difference

A growing number of market analysts are now convinced the bull market of the previous 20 years has drawn to a close, and institutional fund managers are rethinking their investment strategies to accommodate what may be a protracted downturn.

This explains the proliferation of hedge and absolute return funds seeking to generate positive returns whether markets are rising or falling.

The phenomenal growth of the US$600 billion global hedge fund industry suggests a measure of investor fatigue with the traditional long-only style.

The long-only investment approach presumes asset prices will rise over the long term, and is suitable only in bull market conditions. This worked well in the 1990s when asset prices increased well in excess of prices derived from historic valuation methodologies, but many analysts now believe it may be some years before we see a return of a sustained bull market. This calls for a change in fund managers' methodologies and investment styles and will require fund managers to generate profits whether markets are rising or falling to keep their clients satisfied.

CFDs have been described as the near perfect investment tool since they address many of the shortcomings of traditional vehicles such as equities and bonds; and are far more efficient.

For additional information on Spread Betting and CFD's contact Global Trader.

Published on  Wed, May 16 2007, 09:33 GMT

First World Trader (Pty) Ltd  | 1st and 2nd Floor 10 Melrose Boulevard Melrose Arch 2196 Johannesburg
http://www.gt247.com | info@gt247.com