If you are reading this, it may be your first time coming across the term CFDs or Contracts for difference. Hence, the question you might be having is what is CFD?
In this post, we would comprehensively explain any questions you might have about CFDs. You might also want to learn about how to trade CFD we would also cover in this post.
- CFD trading Meaning >
- How does CFD trading work? >
- What can you trade with CFD? >
- Why is CFD trading popular with investors? >
- What are the costs of CFD trading? >
- What is CFD trading hours? >
- What are the Risks of CFDs trading? >
- What is the difference between CFDs and Futures? >
- Is CFD trading& Investment right for me? >
- Trade with ease on Australia’s Affordable CFDs Broker >
A CFD stands for contract for difference, is a type of derivative that enables you to trade on margins. This, therefore, provides you greater exposure to financial markets, such as gold, commidity, forex, cryptocurrency, indices, etc.
When you trade CFDs, you do not buy the primary asset. You simply buy and sell units of the primary asset. Individuals usually buy or sell if they think the assets would either rise or fall.
Take a look at the real-time BTC/USD quotes on Mitrade. When the bitcoin price collapses in the financial market, If you sell the BTC/USD at $8000 and you set up the "take profit" at $7200, then if the price continues going down and reach the point of 7200, then this contract will close up and you will take the profits.
Essentially, CFDs are contracts between a trader and a broker. Both parties agree to exchange the difference in the value of each primary security from the beginning to the end of the contract.
In a trading process, you will often meet the following terms that also explained what is CFD trading.
★ Short and long trading
Short or long CFD trading is usually as a result of your actions as a trader. When trading CFD's you can speculate price movements which then informs your decision to either buy or sell. If you buy more CFDs of an asset because you believe the price would rise, this is termed 'going long' and when you sell it is called 'going short'.
The basic of long trade is to “Buy Low = Sell High”. However, a short trade is to “Sell High = Buy Low”.
Online CFD trading is leveraged. This means you can get access to large positions without committing totally to the cost of the outset. If you wanted to open a regular trade you would be required to pay the complete cost upfront. With CFDs, you are allowed to pay a fraction of the cost, for example, 5% upfront. Leverage allows you to spread your capital extensively to maximize profit. Although you are allowed to pay a fraction upfront, profits and losses on CFDs are calculated using the full size of the position.
For instance, If you paid 10% on a position, the profit or loss is calculated based on the total value which is 100%.
Margins are important for trading on leverage. Margins are used to open and maintain positions. They usually represent part of the entire size of a position. There are two types of margins in CFD trading namely Deposit and Maintenance margins. Deposit margins are used for opening positions while Maintenance margins are used to limit losses during trades.
Contracts for difference can be used to hedge losses from an existing portfolio. For instance, if you believe some shares in your portfolio might suffer a short term dip in value, you can offset some of the future losses by going short on the market with a CFD trade. Hedging your risk in the manner would allow you to gain every loss in value through your short CFD trade.
To properly understand how CFD trading works, you would need to understand what you are buying and selling, how you can make money and the cost in this process.
First off, let's look at the contract for differences in a specific market. Let's take the EUR/USD as an example. Below is a contract for EUR/USD.
Mitrade, as the fast-growing forex brokers in Australia, providing a tight spread and low costs for Forex CFDs.
Source: EUR/USD real-time quotes on Mitrade
There are 4 key concepts behind CFD trading.
★ Profit and loss
To understand the profit and loss in CFD trading, you will know how you can make money from it.
Profit or loss = (no. of contracts x value of each contract) x (closing price - opening price)
The formula for calculating profit and loss earned through CFD trading is: multiplying the deal size of the position (total number of contracts) by the value of each contract. (Express this per point movement). Further, multiply the figure by the point difference between opening and closing contract price.
For a total calculation of profit and loss from trades, you would need to deduct any fees or charges you may have paid. These could include overnight funding charges and commission.
For example, if you think the bitcoin price will rise in future times, then you buy 50 bitcoin contracts at the buy price of 7500. One bitcoin contract would then be equal to $10 per point. There are two types of results.
When the price grows at 7505, your profit would be
$2500= (50 x 10) x (7505.0 - 7500.0)
When the price decreases at 7497, your loss would be
$1500 = (50 x 10) x (7497.0 - 7500.0)
★ Deal Sizes
The size of a single contract is dependent on the underlying asset that is traded. This allows CFDs to copy how the asset is traded on the market. This is possible because CFDs are traded in standard contracts or lots.
CFD trades usually have no set expiry dates. To close a position, you would need to close a trade in the opposite direction to the one that opened it. For example, buying a position of 300 silver contracts would be closed when you sell 300 silver contracts.
Daily CFD positions that are left open past the daily cut off time would be charged for overnight funding. The daily cut off time for international markets varies and you would need to find out the cut-off times.
★ Spread and commission
The prices of CFD at quoted in two prices. The buy and sell price. The buying price is the price at which you open a long CFD while the sale price is the price at which you open a short CFD.
The difference between the buy and sell price is called the spread.
The cost of opening a CFD position is usually covered in the spread. This means buying and selling prices would be adjusted to show the cost of making trades.
There are a variety of asset classes that can be traded with CFD investment. Actually, CFD is just a financial tool that involves margin and leverage trading. This enables a trader to enter the market without the need to deal directly with the market. This, therefore, provides better liquidity and flexible execution. This also gives the added benefit of short selling when the market is falling.
● CFD indices
● CFD forex
● CFD cryptocurrencies
● CFD commodities
● CFD shares
CFD trading is one of the few available portals to the indices markets. Trading contracts for differences in indices copy the composition of a particular index. The most popular Indices instruments include: US500, AUS200, UK100
CFDs are also well suited to the Forex market because of the higher liquidity that happens in the market. You can trade popular forex pairs with CFD such as EUR/USD, AUD/USD, GBO/USD, etc.
Commodities can also be traded as CFD, including metals like gold and silver, energy like gas and oil.
Cryptocurrencies market is highly speculative and highly volatile, creating many opportunities for traders. The popular cryptocurrency trades include BTC/USD, ETH/USD, XRP/USD and more.
Traditional investments bring higher costs, while trading with CFDs allow you to trade various markets based on price changes without owning the assets themselves. Therefore, you can diversify your trading portfolio on one broker without using various platforms.
Many investors may don’t know CFD (Contract for difference), but most of them know margin trading or leverage trading. Many traditional trading brokers also allow you to trade with margin and leverage. It’s a good opportunity for traders who want a flexible and short term investment. But you also can’t overlook the high risks.
Here are some of the reasons why trading CFD is popular with investors:
● CFD trading is quite flexible as it enables you to trade on rising and falling markets.
● The leverage obtainable when trading CFDs. You can use a small number of funds to control larger positions. This gives you better options for a spread.
● CFDs can be used to offset any potential loss in value through hedging.
● CFDs are also tax efficient.
● CFDs provide you access to multiple financial markets.
Generally speaking, all of the fees will be shown on the contract of the market. There are no hidden fees on a reliable CFD broker.
The spread is calculated as the difference between the price of buying and the price of selling. When you enter a buy trade using the quoted buy price and leave using the quoted sell price. The thinner the spread, the less the price needs to move in your favor before making a profit. If the price moves against you, you would realize a loss.
● Overnight costs
Overnight funding will be debited or credited if the position is held passed a certain time. This cost depends on the direction of the position and the applicable holding rate.
● Market data fees
In order to trade or view price data for CFDs, you would need to pay the required and necessary market data subscription. But not every platform charges the market data fees.
This only applies to shares. You are required to pay a separate commission charge for trading share CFDs. If you trade forex, indices, gold, or bitcoin CFD, there is no commission fee.
As CFD is just a tool that is available in many instruments trading, there is always something available to trade. Here are CFD trading times of popular CFDs;
Forex CFDs: trading 24/5
Index CFDs: trading 24/5
Commodity CFDs: trading 24/5
Cryptocurrency CFDs: trading 24/7
The busiest trading times are when the markets are traded. We take forex as an example.
Forex Trading centers in the world
Trading hours in local time
Wellington, New Zealand
Hong Kong, China
Johannesburg, South Africa
London, United Kingdom
New York, United States
Chicago, United States
*Please note that all times are 24-hour clocks.
There are various risks associated with CFD trading. The risks associated with trading CFDs usually involve counterparty risk, market risk, client money risk, and liquidity risk.
▲ Liquidity risk
If there are not enough trades happening on an underlying asset, it can cause your existing contracts to become illiquid. This would make your CFD provider request extra margin payments or close your contracts at unfavorable prices.
▲ Client money risk
When you agree on a contract with a CFD broker, they withdraw the initial margin and reserve the right to ask for additional margins from the pooled accounts. If other clients in your pool fail to meet margin calls, the CFD provider can collect from the pool account and this might affect returns.
▲ Market risk
CFD trading is basically using derivative assets to trade underlying assets. This causes it to be subject to market forces which can affect returns. Misinformation, government policies, or even changes in market conditions can affect returns.
▲ Counterparty risk
A counterparty is simply defined as the company that provides the asset in a financial transaction. Trading CFDs means trading contracts that have been issued by your CFD provider backed by an underlying asset.
Although Futures and CFDs are both derivative products there are significant differences between them.
If you buy a set number of CFD contracts you expect the market to rise and if you sell this means you expect the market to fall. When trading CFD, you can close your position at any time.
Futures are contracts that you buy when you agree to buy a financial instrument at a fixed point in the future at a predetermined cost. There are a set date and price for the transaction, unlike CFDs.
Now, you know the CFD meaning, how does it work, the costs and risks about CFD investing. Next, if CFD a good investment for you?
If you are an investor looking to make good returns on your money, then CFD trading is definitely for you. You should start with a demo account when trying out CFDs for the first time. Trading CFDs can be risky and It is therefore not suitable for all.
CFD trading is suitable for people who:
● Want to diversify and mix up their portfolio. There are so many markets including shares, commodities, FX, cryptocurrencies, and indices.
● Want the flexibility to be as active or passive as they want when trading.
● Are looking for short term opportunities as CFDs are usually held for days or weeks as opposed to longer periods.
● They are looking for what to invest in but don’t have enough capital.
Mitrade is a simplified online trading platform for CFD markets. They provide users an easy and convenient way to access almost 100 different markets including forex, commodities, indices, and cryptocurrencies. They charge no commissions and offer competitive spreads with up to 200 times the leverage.
They offer an intuitive trading platform with free and technical real-time charts and quotes, which is user-friendly for new traders and experienced traders.
Moreover, Mitrade is regulated by ASIC (An Australia regulatory license), which is one of the first-level finance licenses. Therefore, you don’t need to worry about safety and scams.
What can you trade with Mitrade?
Forex CFDs: EUR/USD, GBP/USD, USD/CAD, AUD/USD, USD/JPY and others
CFDs on indices: EU50/ FR40/ NAS100/ AUS200/ US30/ UK100/ HK50 and others.
Commodities: Silver, Gold, Platinum, WTI, and others.
CFDs on popular cryptocurrencies: Bitcoin, Ethereum, Litecoin, Ripple, etc.
CFDs are a leveraged product and can result in the loss of your entire capital. Trading may not be suitable for everyone. Please consider the risks before using Mitrade services. You do not own or have any interest in the underlying assets.
Do you want a seamless trading experience?
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