Such an arrangement has both the positive side and the downside. The inherent advantages and disadvantages of swap transactions are:



You watch the price variations in stocks without owning them. The profit/loss is calculated on the basis of difference between the buy and the sell price. Contracts trade on margin, investors need not invest heavily in cash; they need small portion of the total value of a position to trade. A CFD will take into account any corporate actions and developments that take place, like dividends and stock splits. Traders use CFDs as they allow them to leverage into ?stocks? for little upfront cost. In a falling market, you have the option to sell the CFD that you do not own and buy back at an opportunity that is suitable to you, and the difference is your profit.

As for the disadvantages, most of the CFDs are on OTC (over the counter) derivative. The CFD provider is the counterparty to the contract, not a Security Exchange. The terms and conditions are drafted to benefit the CFD provider and those conditions will have to be agreed by you.

This swap market and contract and the resultant deposit is not a down payment for the balance of the CFD trade. It is a margin held by the provider as security against any possible losses. A possibility exists that the investor may receive the call demanding money if one has bought the stock assuming that it was heading up and the share price falls.

The remedy is the use of a stop loss which is activated by the CFD Provider at a % move in the share price against the trade. The adjustment is done according to the leverage scenario. With this, there is no possibility of margin call demands. But you are liable to pay interest on the amount of the transaction, irrespective of the amount of margin which you have contributed.

CFDs allow the investor to cut the losses quickly and leave the profits to run. This opportunity of fast exit at the prevailing market price makes it possible for greater risk control. Placing automated Stop Loss orders can exit you out of suggestions that go against you while you are busy in your day-to-day activities.

Over the last few years, CFD, as a financial instrument is gaining popularity in the Asian markets. They are marked to market everyday and they do not have a fixed expiration like an option. With no time value or volatility premium, the CFD is only a one for one equity swap. You settle in cash, for profit or loss, once you are ready to flatten your position.

Also, like the equity swap the CFDs are OTC which means the contracts can be made as per the requirements of an individual and they also avoid the exchange fees too. Of course, selling may be a problem if you can't find a seller for your custom CFD.

In the realm of profits, with the ever increasing thirst for more returns, the Stock Exchanges realized that they could greatly leverage profits while pushing the marketing of these risky? bonds? by creating an unregulated insurance industry to provide protection to the buyers about the risk involved in such transactions. With no legal obligation to maintain capital reserves sufficient to pay the obligations resulting out of the insurance cover, this system does not offer complete protection in the event of major crashes in the market.

Trade through swap markets and contracts are good for those who are good at the arithmetic of stock exchange.