A Contract for Difference (CFD) is a contract made between a buyer and a seller for a specified product, where one party agrees to pay the other the price difference between the opening and the closing price of the contract.
How do CFDs work?
The logic behind trading CFDs is similar as investing in any other market, like stocks for example. If the price of the stock goes up by 5%, your investment does the same. If on the other hand, the price of the stock goes down by 5%, your investment also loses 5% in value.
With CFDs, the major difference is that your investment is now a contract which offers you more flexibility than owning the real stock: You can apply leverage, set stop-loss and take-profit orders, and choose when to realise your gain/loss by closing the trade.
When investing in stocks using CFDs and no leverage (1:1), the deal carries no more risk than if you were investing in the actual stock.
Why Trade CFDs
There are many benefits and advantages of trading CFDs.
Here are some reasons why so many people are choosing this market.
CFDs offers ability to leverage your investments, you can trade larger volumes with a fraction of the capital.
You can profit from a market moving in either direction, depending on what position you take.
Range of Markets
You can invest in a market which suits your trading style, and potentially see better returns.
Risk can be limited by reducing leverage and putting down a stop loss order on CFD investments.
What are the costs of CFD trading?
When trading CFDs you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price.We offer consistently competitive spreads.
At the end of each trading day (at 5pm New York time), any positions open in your account may be subject to a charge called a ‘holding cost’. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.
Commission (only applicable for shares)
You must also pay a separate commission charge when you trade share CFDs.
How to trade CFDs
Choose the financial instrument
A trader first needs to choose the financial instrument or asset that he wants to trade in, such as EUR/USD or S&P 500 index or Gold, etc.
Choose to buy or sell
It is the sole decision of the trader to either buy (go long) an asset or sell it (go short), depending on predictions of a rise or fall in prices respectively.
Enter a trade size
The value of one unit of CFD can vary depending on the instruments that have been chosen to trade, and on the broker.
Manage your risk
A crucial part of trading in CFDs is to learn to manage the risks associated with it, the primary tool being the stop-loss orders.
Monitor your position
After placing the trade, it is important to monitor the any open positions and make sure any stop orders or take-profit orders are in place and follow the real-time profit or loss.
Close your position
If the trade is not automatically closed out as a result of a stop or take-profit orders being triggered, it is preferable to close the trade when the trader is ready.