Stock Market CFDs: What Are They? Explanation

Stock Market CFDs: What Are They?  Explanation

Well known to traders, the abbreviation CFD in French means “contract for difference”. This new type of financial product was born in London in the 1990s before becoming more popular in the stock market.

“Contract for difference” is a product of the stock market, which qualifies as a “derivative financial instrument”. It is classified as a complex product that can cause loss exceeding the amount of investment through double leverage. CFD refers to core values, therefore, indirectly to all types of values ​​(stocks, commodities, currencies, indices, etc.): the goal is to speculate on changes in the asset, up or down, without any withholding. it. The seller and the buyer take part in the contract. Due to this agreement, the buyer does not become the owner of the underlying values.

He does not buy or sell them. CFD involves signing an agreement with the seller. This agreement indicates that the difference arising from the value of the underlying asset at the time of its sale and at the time of signing the CFD will be credited or debited from the buyer’s account. When repurchasing an asset, the buyer will charge the difference if the change in rates between the two transactions is positive. If the difference is negative, the buyer will have to pay a margin to the seller. The financial community values ​​these products because they allow you to earn big with a small contribution and are subject to much more flexible rules than stock market values, with their variations. Considered flexible and profitable, CFD, however, has some drawbacks and requires insiders to practice it. Make a note of: CFD advertising is banned in France, as is campaigning.

What are the benefits of CFD trading?

Investing in the stock market involves many restrictions: the rate of the minimum amount depending on the shares, waiting for the opening of stock markets, waiting for the retention period, and so on. As a by-product, CFD is more plastic. It is subject to the same changes as the baseline that it tracks, but without a minimum investment threshold and cost of time. And because CFDs are quoted constantlyyou can act at any time even during the stock market crisis, with immediate effect and lower fees than for the direct purchase of shares.

The main advantage of CFD is, first of all, its very high leverage effect, which allows you to invest little and be available for small portfolios while bringing a lot. Twenty times the leverage means an investment equivalent to one twentieth of the target asset. A positive change of 5% will be enough to double the rate.

Another advantage: CFD provides an opportunity speculate down, in other words, to “shorter”that is, you can sell what he does not own, assuming a fall in value, and then buy it at a lower price and earn the difference.

What are the disadvantages and risks of CFD?

The only known disadvantage of CFD is leverage, as a The main advantage of boomerang return. In fact, if it may be interesting, this lever effect also leads to large losses. “CFDs are very risky products. They are used for one or more days. They do not meet medium- or long-term investment needs,” the Autorité des marchés financiers (AMF) said on its website. “If you want to invest in CFDs, invest in them only if you are fully aware of the risks associated with this product and dedicate only a small part of your savings to it.”

In the above case of the lever effect twenty times, a negative deviation of 5% leads to a loss of all investment. And if the deviation exceeds 5%, then the loss will be greater than the amount invested. That’s why traders are wary of inexperienced financiers. It is recommended to already practice the stock market some time to know the principles of operation and risks before starting CFD. It is also necessary make sure the financial intermediary you choose is approved “Provider of investment services” by an official financial regulator, such as ACPR (French Prudential Control and Problem Solving Authority).

What is CFD taxation?

CFD taxation is simple because it is subject to income tax in the same way as traditional securities. Thus, the increase or loss of capital for the year must be stated in the declaration. Winnings are subject to a one-time single tax (PFU) of 30%, also known as a single tax. Taxpayers have the option to choose a progressive income tax scale.

Translation of CFD (Contract for Difference, Contract for Difference) into English CFD

Using CFD, you do not own your shares. Using CFD, you do not own your shares.