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What Are CFDs (Contract for Differences)?

Trading in CFDs is one of the most popular choices for investing in a wide range of markets around the world. Traders of all experience and knowledge levels are involved, and almost every top forex broker provides wide ranging access to CFD trading in a host of assets. But what exactly are CFDs?

What are CFDs

Trading in CFDs is one of the most popular choices for investing in a wide range of markets around the world. Traders of all experience and knowledge levels are involved, and almost every top forex broker provides wide ranging access to CFD trading in a host of assets. But what exactly are CFDs?

First off, CFD stands for Contract for Difference. The clue is in the name here. CFDs are agreements between the trader and their broker to pay the difference between the opening and closing price of an asset.

The Basics of CFDs

CFDs essentially allow you a great deal of flexibility as a trader which you may not otherwise have had access to. This is particularly important in the modern age of discount brokers, and online trading. Platforms like eToro facilitate the trading of CFDs with great efficiency, convenience, and low cost. This opens up a number of new avenues for you as a trader.

  • The ability to access global markets in a wide range of assets with speed
  • Trading in everything from forex currency pairs to precious metals CFDs
  • Access to leveraged trading on assets
  • Low trading costs and high flexibility

CFDs have their basis in futures trading as another type of derivative being offered, and are becoming increasingly well-regulated. CFD trading through a top online broker you can expect regulation in place from some of the top bodies like CySEC, ASIC, the FCA, and others keeping you fully protected.

Differences Between Trading CFDs and Real Assets

One of the key points you should know about trading CFDs is that, when doing so, you are making a contract with the broker to pay the difference in price between opening and closing the position, but you are not actually purchasing the underlying asset. There are a number of advantages and some limitations when it comes to this type of trade. It will be up to you to decide if this is the best choice to fit your trading needs.

Receiving Dividends: This is something that you will want to double check carefully with your chosen CFD broker. Of course, if you are trading traditionally and owning the underlying asset you will receive a dividend when they are scheduled from the company. When CFD trading, some brokers may not pay out dividends. Many such as eToro will still credit the dividend to your account, though it is something you need to check on an individual basis.

Trading on Leverage: Trading CFDs with the majority of online brokers allows for you to trade on leverage. The amount of this leverage depends on the regulatory body which oversees your broker operations, but is capped at 30:1 on major forex currency pairs with CySEC for example. Such leverage access allows you to open larger positions, with smaller amounts of capital. This can increase your potential gains, though there is of course a heightened risk attached if the market moves against you.

Fees and Flexibility: The area of fees and trading costs is one where you can certainly benefit when it comes to trading CFDs. With traditional trading brokers, you are typically charged relatively high transaction fees, or other management fees based on your portfolio. When it comes to trading CFDs with major brokers like eToro, there are no such fees. In fact, you will only pay the spread with most online CFD brokers, and this is kept very competitive.

On flexibility, this can be particularly useful if you wish to “go short” on an asset. That is, to profit as the price goes down. Through traditional ownership, this is limited to trading in options, and some ETFs. CFDs make this much more possible. You can even open short positions from the outset. Advanced and user-friendly trading platforms can also help you to set stop losses to manage you risk in certain trades.

Things to do Before Trading CFDs

Naturally, there is always an inherent risk when you are trading any kind of instruments. The same goes for CFDs. There are though, a few steps you can take in order to set yourself up for success before you start to trade.

Choose a Trusted Broker: Just as with forex trading, or any other kind of trading, your broker choice is the first key. Here you want to choose a well-recognized name. Brokers like eToro are known all over the world, and for good reason. They offer a safe, and well-regulated trading environment as well as other things to help you along.

Research Trading Platforms: Many brokers will offer more than one trading platform that you can choose when CFD trading. These could be the well-known MT4, MT5, or cTrader platforms, or the brokers own proprietary trading platforms. The spotlight is on you to do some research here and choose the one which you find suits you best. Here are a few key points to think about when doing this:

  • Consider how many traders are already using a platform.
  • How many assets can you trade through this platform and broker. Are your favored markets available?
  • How user-friendly is the trading platform, and what support is available?

Build Some Knowledge: You do not have to be an expert on all things CFD trading, but it certainly does help if you can build some knowledge before you get started. This includes key terms, the basics or trading, and using your trading platform. Again, a lot of this can be accomplished through a top broker as many offer comprehensive education sections to keep you on track at various stages. It is another thing to look out for.

Opening a demo account is also a great way to tick all of the boxes above. These are offered by almost all CFD trading brokers, and can completely replicate the experience of live trading but without any of the risk. Through these accounts you trade with virtual currency, sometimes for an unlimited period time. Overall, they are a great way to build the knowledge, and expertise you need to start trading CFDs.

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Daily Financial News

Don’t Count On JPY Correction; Staying Long GBP/JPY

The path of the potential pace of the JPY decline may still be underestimated by markets, which continue trading the JPY long.

While the 10% USDJPY advance from September lows looks impressive from a momentum point of view, it may no thave been driven by Japan’s institutional investors reducing their hedging ratios or Japan’s household sector reestablishing carry trades.

Instead, investors seemed to have been caught on the wrong foot, concerned about a sudden decline of risk appetite or the incoming US administration being focused on trade issues and not on spending. Spending requires funding and indeed the President-elect Trump’s team appears to be focused on funding. Here are a few examples: Reducing corporate taxation may pave the way for US corporates repatriating some of their USD2.6trn accumulated foreign profits. Cutting bank regulation could increase the risk-absorbing capacity within bank balance sheets. Hence, funding conditions – including for the sovereign – might generally ease. De-regulating the oil sector would help the trade balance, slowing the anticipated increase in the US current account deficit. The US current account deficit presently runs at 2.6% of GDP, which is below worrisome levels. Should the incoming government push for early trade restrictions, reaction (including Asian sovereigns reducing their holdings) could increase US funding costs, which runs against the interest of the Trump team.

Instead of counting on risk aversion to stop the JPY depreciation, we expect nominal yield differentials and the Fed moderately hiking rates to unleash capital outflows from Japan.The yield differential argumenthas become more compelling with the BoJ turning into yield curve managers. Via this policy move, rising inflation rates push JPY real rates and yields lower, which will weaken the JPY. Exhibit 12 shows how much Japan’s labor market conditions have tightened. A minor surge in corporate profitability may now be sufficient, pushing Japan wages up and implicity real yields lower.

JPY dynamics are diametrical to last year . Last year, the JGB’s “exhausted”yield curve left the BoJ without a tool to push real yields low enough to adequately address the weakened nominal GDP outlook. JPY remained artificially high at a time when the US opted for sharply lower real yields. USDJPY had to decline, triggering JPY bullish secondround effects via JPY-based financial institutions increasing their FX hedge ratios and Japan’s retail sector cutting its carry trade exposures. Now the opposite seems to be happening. The managed JGB curve suggests rising inflation expectations are driving Japan’s real yield lower. The Fed reluctantly hiking rates may keep risk appetite supported but increase USD hedging costs.Financial institutions reducinghedge ratios and Japan’s household sector piling back into the carry trade could provide secondround JPY weakening effects

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Daily Financial News

Mexico raises interest rates, cites Trump as risk

The head of Mexico’s central bank says U.S. Republican candidate Donald Trump represents a “hurricane” sized threat to Mexico.

Banco de Mexico Gov. Agustin Carstens told the Radio Formula network Friday that a Trump presidency “would be a hurricane and a particularly intense one if he fulfills what he has been saying in his campaign.”

Trump has proposed building a wall along the border and re-negotiating the North American Free Trade Agreement.

Mexico’s central bank raised its prime lending rate by half a percent to 4.75 percent Thursday, citing “nervousness surrounding the possible consequences of the U.S. elections, whose implications for Mexico could be particularly significant.”

Mexico’s peso had lost about 6 percent in value against the dollar since mid-August. It recovered slightly after the rate hike

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Financial News

Africa’s first Fairtrade certified gold co-operative offers hope to gold miners living in poverty

Syanyonja Artisan Miners’ Alliance (SAMA) has become the first artisanal small scale mining co-operative in Africa to become Fairtrade certified, bringing much needed hope to impoverished communities who risk their lives to mine the rich gold seam that runs around Lake Victoria.

SAMA is one of nine previously informal groups from Uganda, Kenya and Tanzania which has benefitted from a pilot project launched by Fairtrade in 2013. This innovative program aims to extend the benefits of Fairtrade gold to artisanal miners across East Africa.

In that short time, SAMA has undergone training in business and entrepreneurship, as well as safe use of mercury, internal control systems, labour rights and better working conditions, health and safety and more. Previously, daily contact with toxic chemicals used to process gold meant members risked disease, premature births and even death.  Fairtrade gold was first launched in 2011, and SAMA now joins Fairtrade certified gold mines MACDESA, AURELSA and SOTRAMI in Peru.

The co-operative produces just 5 kg gold per year, but nevertheless has the potential to significantly benefit many people in the local community through better conditions through certification. It is expected that Fairtrade and organizations like Cred Jewellery will support the miners, ensuring their gold can be refined and made available to jewellers in the UK and other markets.

Gonzaga Mungai, Gold Manager at Fairtrade Africa said: “This is a truly momentous and historical achievement and the realisation of a dream that is many years in the making. Gold production is an important source of income for people in rural economies. Congratulations to SAMA, it sets a precedent which shows that if groups like this can achieve certification, then it can work for others right across the African continent.”

The Fairtrade Gold Standard encourages better practice and changes to come in line with international regulation around the production and trade of so-called ‘conflict minerals’. Under the Standard, miners are required to:

  • Uphold a human rights policy preventing war crimes, bribery, money laundering and child labour
  • Clearly represent where the minerals were mined
  • Minimise the risks of conflict minerals through robust risk assessments and collaboration across supply chains
  • Report to buyers and trading partners regarding the risks of conflict minerals

Now in its second phase, the programme will focus on supporting other mining groups in the region to access affordable loans and explore a phased approach to accessing the Fairtrade market, allowing more mining co-operatives across Africa to participate in the programme.

Gonzaga added: “Sourcing African metals from smallscale miners in the Great Lakes Region is the responsible thing to do. For a long time companies have avoided buying gold from this region, with devastating consequences for impoverished communities who were already struggling. It has driven trade deeper underground, as unscrupulous buyers pay lower prices and launder illegal gold into legitimate supply chains. That’s why we have chosen to work with these groups to help them earn more from their gold within a robust compliance system that offers social, environmental, and economic protections.”

The Fairtrade gold programme offers a small but scalable solution to sustainable sourcing of gold from the region in line with Section 1502 of the Dodd-Frank Act in the US, OECD Due Diligence Guidance and recent EU Supply-Chain Due Diligence proposals which could come into effect in 2016. This means that up to 880,000 EU firms that use tin, tungsten, tantalum and gold in manufacturing consumer products could be obliged to provide information on steps they have taken to identify and address risks in their supply chains for so-called ‘conflict minerals’.

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