- Retail Traders or Institutions?.
CFDs appeal to a broad range of users for different reasons and the people trading in CFDs range from sophisticated retail traders to day traders, to mums and dads. Hedge funds, institutions and wholesale clients are also known to make use of CFD trading and the market is still growing.
Professional traders employed by investment banks or trading companies are able to utilise CFDs for speculation or hedging purposes. In this instance their ultimate goal is to gain from or hedge against the risk of, volatility of price movements in market instruments. Institutional investors like hedge funds and stock portfolio managers are also known to utilise CFDs to manage funds on behalf of investors; in this way CFDs provide them with additional flexibility to add to their existing investment options and allows them to manage the short-term risk associated with the daily movements in the value of their portfolios. CFDs in particular allow institutional fund managers access to cheap leveraged exposure on a wide range of market instruments (including instruments that may not have liquid markets of their own) with the added flexibility of being able to open short positions to benefit from market declines.
Indeed, the volatility of the last few years has accelerated the use of derivative instruments as investors have sought to profit from market volatility or hedge their portfolios against losses. Private investors today also have access to real-time data and news, the same information as market professionals and are increasingly allocating a part of their portfolios to more speculative trading products like CFDs.
In the past hedge funds were also known to build positions in companies whilst avoiding having to inform the market of their large positions thus avoiding attracting undesirable attention to their investment objectives (in some instances building stakes in companies that were involved in takeover talks) but this is something that authorities around the world have started taking steps to restrict by imposing disclosure requirement to CFD holdings.
CFDs offer flexibility, leverage and cost effectiveness to institutional, professional and non-professional traders alike. However, market experience is required to get the most out of CFDs and they are better suited to traders and experienced investors.
- Are CFDs suitable for me?
Ideally you should have some prior experience in trading any leveraged instruments. Contracts for difference are also likely to appeal to more adventurous investors who are comfortable trading in and out of volatile markets and are comfortable with risk.
The ability to trade CFDs has greatly improved the trading opportunities for a great many traders. CFDs are an ideal trading vehicle for traders with a relatively short-term time horizon and a desire to increase their market exposure on a given level of available capital. CFD trading may not be so suitable for traders with a longer term time horizon due to financing charges which can build up over time. Similarly, traders that are unable or unwilling to monitor their open positions and manage their trades might fi nd that CFDs are not suitable for them.
Thus, in practice, investors with prior trading experience and who are familiar with money management are more likely to choose CFDs as a speculative choice. Finally do understand that CFDs are not suitable for all investors. They are leveraged instruments and thereby riskier than ordinary shares trading and so require a greater degree of sophistication when trading. I frown when I go to trading exhibitions and find a number of CFD providers touting to absolute newbies. Sure, CFDs can be very rewarding when a trader has knowledge, skill, discipline and time on his side and when contracts for differences are used in the appropriate market. However, one needs time to train and develop discipline; CFDs will be there 6 months from now so what's the hurry?
Having said that contracts for differences are however a useful addition to any financial market since their presence enhances the range of financial products available to investors. The key, of course, as always, is education, understanding and knowing the right questions to ask.
- Are CFDs suitable for novice traders?.
Short answer is NO. If you don't have prior trading experience whatsoever i wouldn't recomend CFDs to start with.Even though these are remarcable products, which happens to be my favourite trading products, for a novice trader they may not be the wises choice.Market experience is required in order to get most on CFDs.
CFDs are geared speculative products traded on high leaverage which makes them difficult in a market like the credit crysis or the real estate bubble several years back. If you get it right sure you make a lot of money. But if you get it wrong you can take a substantial hit on your account balance.
Trading in general , no matter the sector , field ,products or instruments traded implies a great level of risk which may not be suitable for all investors. Extensive education , research & demo trading is required in order to aquire a minimum level of experice.
- Final Notes!.
The key to a long term succes in trading CFDs is to trade small amounts with low exposure on your account permiting you to keep your positions open for more than 1 day .That will alow you to trade with the trend and not against it while making small and consistent returns on your trades without having always the risk of your trade going against you and beeing force to close sooner every time.
I know there are many of you who are eageared to learn more about CFDs , trading strategies ...etc ;as i was back in 2010 when I started trading them. I have a 3 years experience trading CFDs, and my favourites are Agricultural commodities. As i said said in my previous article this will be a long series so stay tunned for part 3 probably next week or lately in the 1 week of December.