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CFD Trading Alert – A 5-Minute Guide on CFD Pricing

By: Steve S H

CFDs(contract for difference) are derivatives which offer you the possibility to inquire earning alternatives by trading on speculating price shifts of applicable security options like commodities, stocks, indices and currencies. Based on the norms of CFD trading, there is no actual acquisition or purchase of relevant securities.  Your earning range in CFD trading does not include dividend payments.

A person engaged in financial CFD is in essence engaged in speculative trading which basically involve a stake on a future trading event.  In this kind of trading, you earn and or get burned with the dips and peaks in value during the term of your trading contract.

CFD Valuation Strategy

The prevailing value of applicable investment instrument reflects the pricing strategy of CFDs that are adopted. Just like with share trading, you have to include in the equation commission for the transaction. A lot of leading CFD providers charge a transaction fee on the basis of a fixed percentage system, and the competitive dealing commission charges 0.1 % on the transaction on the lower end of the price spectrum  It is only getting better with respect to the high charges of 0.25 imposed a few years back.

CFD Minimum Margin

The minimum margin signifies the initial amount you need to keep upfront as a deposit to engage in a CFD trade.  The amount equal to the minimum margin will be kept as security and a CFD broker will serve as a custodian to the deposit.  Its only to ensure that you abide by your financial commitments while going for CFD trading.  The initial margin is expressed in percentage, and it is determined based on the state of liquidity and volatility of specific investment instruments.

The initial margin ranges from a low 1 percent for the highly liquid investment instruments to as high as 75%. Its beneficial to opt for a provider who offers highly competitive margins, only to ensure that you don't tie up a lot of funds locked in the margin.  This means that it is not a wise financial move to trade a position that bears a high 75% initial margin since at the price level, it may be more practical to go for a straight purchase of the shares involved.

CFD Variation Margin

In addition to the CFD initial margin, you also have to take into account the related margin that may be added to the price to reflect major price shifts against a particular share position. This type of margin is referred to as variation margin.The variation margin, which is alternative referred to as maintenance margin, is dependent on the results of re-evaluation of contract on intra-day market to market share variation.

So if a trader engages in a long CFD trade on a specific share and the prices take a dip, then the trader has to pay the differential amount which is the maintenance margin.   Hence this margin is defined as the amount that a trader pays to cover the deficit induced by an unfavorable shift in the share prices.   In the same manner, if you are on a short while the market takes a dive, then you would get a variation margin which is equivalent to the value of the positive shift in the share position.

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