(CFD is an acronym for Contracts for Difference. Those are innovative financial instruments provide traders all the advantages of buying a particular stock, index, or commodity position – without having to physically own the underlying asset itself. It’s a manageable and cost effective trading option, to trade the change in the price of multiple commodities and equity markets, with leverage and direct execution. An investor enters into a contract for a CFD at the quoted price and the difference between that open price and the and the close price when the investor closes the trade is settled in cash – therefore the term “Contract for Difference”
CFDs are traded on margin. This means that you are geared to leverage your investment by opening positions of larger volume than the funds you have to deposit as margin collateral. The margin is the amount reserved on your trading account to meet any potential losses from an open CFD position.
Example: a big oil company expects a record result and you think the price will go up. You decide to buy 10 000 units to 1,950 pence. If the price goes up, say from 1,950 to 1,990 pence, you will get a gain of 40 pence. With 10,000 units corresponds to a gain of GBP 4 000. If the exchange rate fell by 40 pence, you would, however, have lost £ 4000.
Buying in a rising market
If you buy a product you believe will rise in value, and your analysis is right, you can sell the product for a profit. If you are wrong in your analysis and the values fall, you have a potential loss.
Sell in a falling market
If you sell a product that you think will fall in value, and your analysis is correct, you can buy the product back at a lower price for a profit. If you’re wrong and the price rises, however, you’ll get a loss on the position.
Trading on margin
CFD is a geared product, which means that you only need to use a small percentage of the total value of the position to make a trade. Margins rates may vary between 0.20% and 20% according to local regulations in different countries.
It is possible to lose more than originally deposit so it is important that you understand what the full exposure and that you use risk management tools such as stop loss, take profit, stop entry orders, stop loss or boundary to control trades in an efficient manner.
CFD prices are displayed in pairs, buying and selling rates. Spread is the difference between these two courses. If you think the price is going to go down, please use the selling price. If you think it will go up, please use the purchase price. For example, look at the UK 100-heading, it may look like this:
UK 100 6300/6301
Buy to 6,301 if you think UK100 will rise in value.
Sell to 6,300 if you think UK100 will fall in value.
In this example, the spread of UK 100 1 point.
You can find an overview of the costs associated with CFD transactions under transaction costs.