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CFD Trading Explained

The world of share trading can be exciting and mindboggling but at times the process can be a little monotonous and routine.

An interesting variation on traditional share trading is CFD trading. Trading CFDs works in a similar way to financial spread betting allowing you trade without stamp duty. However it does make you eligible for the taxes associated with conventional share dealing profits like capital gains tax and income tax.

CFD trading requires the same intuition to predict the future and knowledge of the stock market.

So what is a CFD and what does is stand for? CFD is abbreviated for contracts for difference and it is basically an agreement between two individuals, the buyer and seller. The agreement states that the buyer or seller is required to compensate the difference between the opening and closing price of a contract.

For example, if you predict that the price of a share is going to increase in future, you can purchase shares, if the share price does move in your favor and increase at the time of the contract, you make money. CFD trading is beneficial for a number of reasons. With CFD trading, you can profit from selling your shares as well. Due to the agreement in place, if you think the price of a share is going to drop you can go short (sell), if your prediction sticks, you will profit as the prices reduce.

Ordinary share trading has several levies such as capital gains tax, income tax and stamp duty. With CFD trading you are relieved of stamp duty. While this is a measly 0.05%, it does add up over time, thus in the long run, this can be a very lucrative advantage.

CFD trading is strikingly similar to conventional share trading however the main distinctive feature is the ability to profit from shares that are losing. If you are looking for a change of pace, CFD trading may just be the right way to go.