What are CFDs or Contracts for Difference?
The CFD (Contracts for Difference) is a “Financial Contract for Difference”, where two contractual parties exchange cash payments (differences), depending on the price/rate of the subject of the contract between the moment of conclusion and the termination of the contract. CFDs are products that basically have any financial instrument whose value is variable.
They offer a broad range of CFD CFDs, US Treasury bonds, currency pairs, commodities and stock indices, such as the FTSE100, which consists of stocks of the largest companies in the United Kingdom.
The contract also has a ‘buying’ and a ‘sales’ price so that you have the option of choosing – to “buy”, also known as a long position, or “sell”, known as “taking a short position”. It is important that you know that you are trading through a contract for a difference, not a physical asset in the primary market. On the other hand, you have the flexibility and the ability to use orders to stop possible losses through the so-called. STOP order.
What is a leverage?
Financial contracts for differences are instruments to which the effect of a financial lever is applied, i.e. leverage. This means that by placing a small amount of the deposit (required margin), you get a much greater exposure to the market. In other words, in order to open the position, you need to invest a far smaller percentage than the full value of the trade.
Margin trading allows you to increase the yield faster if the price/course is in the desired direction for you. Otherwise, losses are also multiplying. Potential profits come with significant risks.
Our CFD Online Trading Platform offers up to 1:400 leverage.
CFD short positions in the declining market
CFD trading allows you to sell (enter a short position) instrument if you believe that there is a fall in value. The goal is to profit from downward price movement. If your forecast turns out to be true, you can buy a financial instrument back at a lower price to profit. If the forecast is incorrect and the value rises, you will suffer a loss.
What are the CFD trade costs?
For example: When you trade CFD, you have to pay for the front, which implies a difference between the purchase and the selling price. You enter the shopping store using the stated purchase price and exit on the basis of the selling price. The lower the lower, the lower the need to move prices to your advantage before you start to make a profit. We offer competitive battles.
Stock Keeping Costs: At the end of each trading day (at 17 o’clock in New York time), all positions open in your account may be in charge of the so-called swap rate “inventory costs”. The inventory costs may be positive or negative, depending on the direction of your position and the applicable holding rate.
Our CFD Online Trading Platform offers spreads from 0.0 pips and only $8 commission per round lot.
How to trade CFD?
In each market, both sides of the ‘buying’ and ‘selling’ prices of the basic market price are given. You can trade on a long-term market (known as ‘buying’), or you can trade with taking a short position (known as “sales”).
Once you open a position, you will receive a message confirming that it is accepted. If the CFD market is closed, the opening of a position can be denied. Also, it may be that the opening of the position is rejected for other reasons, but the vast majority goes through the procedure without any problems. Check carefully the details on your confirmation message to make sure that the store is the way you intended it.
Your open position will appear in the “open position” section of our trading platform. All the while your position is open, you will be able to see your profit or loss by checking the Profit / Loss column.
When you decide, you can close your position and raise your profits, and to do so, you simply sell the same number of contracts that you originally purchased.
The simplest way to do this is to open the “close-up” screen. When you click on ‘I’m selling’, you’ll get one more confirmation to know that you’ve sold that number of contracts.
Hedging with CFD
For example, I currently have an open dollar/yen (USD / JPY) position. I took a long position, that is, bought the dollar in the expectation that it would strengthen against the Japanese currency. However, the opportunities are changing and I now question whether I have acted well.
Usually, I would have two choices – to close the position now or to keep it open and I am dealing with the uncertainty brought by the future. However, with the CFD, it can simultaneously open another position in the dollar/yen currency pair in which I sell the dollar, or I take a short position on it. So, I open a completely opposite position from the originally open, which is still open. Thus, these two positions, for the most part, come under the assumption that there has been no significant shift in the exchange rates of these two currencies and that the size of open positions is identical.
So, no matter how the currency pair moves in the future, I will still be able to foreclose the loss with a win in the opposite position. My hedge protects me.
Hedging portfolio of real assets
If you’ve already invested in an existing portfolio of real stocks with another broker and think you can lose your value in the short term, or if that’s already happening, you can protect your capital using a CFD. In particular, by taking a short position of the same stock, you can try to make a profit from a short-term fall to compensate for the loss from your existing real-action portfolio.
For example, let’s say you are holding £ 10,000 worth of shares of Apple Corp. If the market allows short selling (real assets), you can do it or take a short position by selling the equivalent value of Apple Corp through the CFD. Then, if the stock price of Apple Corp drops in the primary market, the loss in the value of your real portfolio may potentially be recouped for by the profit received from the trade through the difference deal (CFD). Then you could close your position at the CFD to secure a certain profit until the value of your real actions starts to grow.
Using CFD to protect the portfolio of physical actions is a popular strategy for many investors, especially in unstable markets and circumstances.
Learn how to hedge with ProTrade Markets – a CFD Online Trading Platform 2018.
CFD trade case
So, how is someone trading with CFD? Let’s take a look at an example of a CFD trade using a popular trading DAX 30 index as an example;
In the following theoretical example, DAX currently trades at 13610.5 / 13611.5, giving me the opportunity to sell the German index at the 13610.5 level or purchase at 13611.5. I decided to buy £ 5 DAX at that level of 13611.5, and my nominal risk, in this case, will be worked out as follows;
(Purchase Level x amount I buy)
So, in this case, the nominal risk would be;
13611.5 x 5 = 680.575.00
£ 680.575.00 is the maximum amount of money I would lose if the DAX fell from the current 13611.5 level to zero.
CFD and leverage
As a form of the trade involving leverage, instead of lowering the price of wholesale trade (to 13611.5 x 5, which would cost £ 680.575.00, as well as my nominal risk), I must only lower the total value for starting a trade only in a small percentage. This is done as a percentage of the nominal risk – if the margin is 1% then 680.575.00 / 100 = 6.805,75. Therefore, rounding up for a penny up, £ 6806 is the amount needed to start a trade.
If, however, I decided to sell £ 5 DAX instead of buying, the price of my store would have been;
13610.5 x 5 = £ 68.052.5
The amount I would have to invest in my store would be 1% of that, which means £ 6805.5
Traders are advised not to forget that an increase in leverage increases the risk.
ProTrade Markets – a CFD Online Trading Platform 2018