Archive for June, 2011

There are many financial instruments, tools and products that you can put into right now and gain a passive income as easy as that. But wait, it is not that easy because there are, of course, risks along the way that makes the transaction really challenging. After all, they are just parts of the game that you need to manage carefully and wisely.

Anyway, when it comes to financial trading, you have different options. However, two of the most popular options are the Contracts for Difference (or the CFDs) and the Futures (or also known as Future Options). If you will ask me, these two forms or instruments are among the most popular because of their advantages. For you to better understand the advantages of CFDs and Futures, we will outline some of their advantages herein.

On the one hand, the CFD is a kind of contract between and among two parties where they buyer will purchase from the seller the value of the difference between the existing or prevailing market value of a specific assets compared to the value of its contract time. In some countries, this is actually a form of gambling, which can be a bad or good thing (depending on who is viewing or using it). Some of the advantages of this instrument are the following:

1. It is a margined product. This is the reasons why it can provide the investor a seemingly built-in leverage in order to maximize income, profits or earnings.
2. CFD has favourable taxation treatment in some countries. In several countries like in United Kingdom and other countries in Europe, CFD trading is considered as a gambling activity. Hence, the taxation law is not applicable to it. However, in some countries like Australia, income (or loss) from CFD trading is considered as assessable asset.
3. It has no expiration date. There is also no mandatory execution date for it. The only things that prohibits long term positions for CFD trading is the financial aspect.
4. It has “offsetable” losses. This is because any loss incurred from the early trading can be charged to future profits.

On the other hand, Futures is also a contract that is standardized in order to allow the exchange of a specific asset for a price that is already agreed today. The delivery date is, of course, determined as well in the contract. There are actually at least three (3) popular advantages of Futures, which are the following:

1. It has small charges for commission. If you will compare the commission charges in Futures, you will notice that it is relatively smaller compared to other instrument trading.
2. It is just a paper investment and does not require trading of physical goods.
3. It has higher leverage compared to other instruments.

If you are engaged or want to engage in trading different financial instruments, there are actually a wide arrays or kinds that you can choose from. Two of the most popular instruments that you can choose to invest into are the CFDs and the Options trading. Now, in order for you to better understand these two (2) instruments, it is best if we will draw some comparisons between them and the other popular financial commodities out there.

There are many reasons why choosing the right is very important. One reason is because it is where you will put your investment on and hope to flourish and generate income or profits. No one would, of course, want their money to just go in the waste and leave it for nothing at all. As a wise and practical investor, you always make it a point to assure that you are gaining from it.

Consequently, you would of course want an answer to the question which one is the best that you can go to. Is investing on CFD trading  more worthy than an option commodity or even futures contract? Hence, it is important to know as well the characteristics, basic information as well as advantages and disadvantages of the instrument that you will choose. In our case for now, we will focus on the two (2) most popular instruments in the financial trading.

Now, the most basic thing that you need to understand with these CFDs and options trading is their nature. They are actually both called as the derivate instruments. This is because their prices are primarily derived from something else intangible in the market. For the case of both the CFDs and the options, do you know that their prices are primarily derived from the changes in the stock and index? So, if their prices are both derived from the similar thing, which one is then better? In this regard, I suggest that you continue reading since this is just the first basic information that we drew in comparing these commodities.

Now, resuming to the comparison, even though the CFD trading  is believed to have some resemblances to the activities in the futures and options markets, they still have major differences. Some of these distinctions of the CFDs from other include the expiration date. In CFD trading , there is actually no expiration date, which means that there is no price decay. Moreover, the trading is being done through off-exchange or over-the-counter (OTC) with brokers.

Comparing the CFDs to Options, the latter is more like the Futures, which are referred as an established product. Options, in general, is also being used in order to hedge the risks. When it comes to the pricing of these instruments, people prefer the CFDs because of the simplicity of its pricing.

There are plenty of strategies that you can adopt for your investment when it comes to CFD trading. Well, CFDs are already considered as one of the major financial instruments in the market nowadays. However, most success stories in this market often refer their accomplishments by taking into account the factor of volatility. In this regard, what is market volatility and what are the appropriate CFD strategies that you can try to adopt thereafter?

In the financial world, market volatility refers to the measurement of the variation in the prices of different financial instruments over time. As a matter of fact, there are several types of financial volatility. There are at least five (5) types of market volatility, which are actually historical, actual future, the historical implied, current implied and the future implied volatility.

The actual historical volatility usually refers to the kind of volatility in the price of specific instrument over specific time but with special observation on the last or specific fate in the past. On the other hand, the actual future type of volatility starts on the current time and ends at the future specified date, which is commonly the expiration date of the option or instrument. Furthermore, the historical implied type of market volatility in the world of finance is the one that is similar to the implied volatility, in general, which is being observed based on the historical prices of the specific instrument. In contrary with the previous one, the current implied type of volatility is derived based on current prices of the instrument instead of the historical one. Last, but not the least, is the future implied kind of volatility that is observed based on the future prices of the instrument.

Now, given these basic and essential information about market volatility, it is already the right time to apply it in CFD trading strategies. In general sense, the CFD strategies considering the market volatility that you may adopt are divided into two (2) groups, which are the strategies either for high volatility or for low volatility.

On the one hand, there are at least three (3) strategies under the group for high volatility. These are the strategies for event risk, breakouts and selling insurance. First, event risk trading strategy is actually one of the usual and most common methods in trading CFDs and other instruments. This is being done by taking into consideration the earnings report as well as the economic indicator as your event and use those to prepare and predict.

On the other hand, strategies in trading CFDs with low volatility include the Range Trading, Riding the Trend as well as the Carry and Yield tactics. The latter most strategy is the one that takes advantage of the currency by having a mixture of buying and selling. Unfortunately, most investors do not adopt this one.