Contract for Difference (CFD) is a financial instrument, which allows you to speculate on price movements of different markets, such as indices, commodities, shares and treasuries or its derivatives or value estimations.
Unlike traditional trading on those markets, you don't need a large amount of capital to start trading — CFDs are traded on margin, similar to Forex, often using leverage.
CFDs can be used to speculate on price movements, diversify or hedge existing equity or commodity portfolios without the need for significant collateral. It offers higher flexibility in lot sizes compared with classic Futures trading.
Although the price of a CFD usually reflects the price of an underlying asset, this isn't necessarily the case. Please be advised, that you're not buying or getting ownership of the underlying asset itself.
Contracts for Difference are made cater to the need of most traders:
Так же, как и торговля Forex, торговля CFD позволяет Вам покупать (открыть длинную позицию), если Вы верите, что цены на рынке поднимутся, или продавать (открыть короткую позицию), если Вы верите, что цены на рынке упадут.
CFDs are traded on leverage, meaning you need only a small deposit to open your position rather than having to put down the full value of a trade.
A number of CFD instruments are traded outside classic markets trading sessions.
If you expect your existing stock or commodities portfolio may lose some of its value in a short term, you can use CFDs to cover this loss by short selling.
Contracts for Difference (CFDs) offer a unique way to participate in the financial markets. But how do they work? Unlike traditional stock ownership, where you buy and hold assets directly and may need to worry where the asset is kept, CFD trading revolves around taking advantage of price movements of the asset, without need of ownership. CFDs cover a very large range of financial instruments.
When trading CFDs, a trader opens an account with a CFD broker, deposits funds, and selects the financial instruments they wish to trade, such as stocks, commodities, or currencies. Each CFD represents an agreement between the trader and the broker to exchange the difference in the value of an asset from the time the contract is opened to when it is closed.
For example, if a trader believes that the price of a particular stock will rise, he can open a "long" position by buying a CFD on that stock. If the price of the stock rises as expected, the trader can sell the CFD at the higher price, the profit is the difference between the buy and sell price, minus any associated costs such as commission and rollovers. Conversely, if the trader expects the price to fall, he can open a "short" position by selling a CFD. If the price falls, the trader can buy back the CFD at the lower price and earn the price difference.
A defining feature of CFD trading is the use of leverage, which allows traders to control a larger position size than their account currency balance would normally permit. For example, with 10:1 leverage, your $1,000 could control a CFD position worth $10,000 (10 x $1,000). This essentially magnifies your market exposure, allowing you to potentially amplify your profits if your prediction about the price movement is correct.
Leverage comes with a requirement - margin. This is a deposit you must maintain in your account to hold a leveraged CFD position. The margin requirement is typically expressed as a percentage of the total position value. For instance, a 5% margin requirement on a $10,000 CFD position would necessitate a minimum account balance of $500 (5% x $10,000).
Brokers also require maintenance margin to ensure that traders can cover potential losses. In the event that the market moves against the trader's position and the account balance falls below the maintenance margin level, a margin call may occur, requiring the trader to deposit additional funds or close positions to limit further losses.
CFD trading offers a number of advantages that appeal to both novice and experienced traders. These are some of them:
CFDs allow you to speculate on the price movements of a wide variety of financial instruments with increased leverage than is allowed in direct trading. This variety includes stocks, forex (currency pairs), commodities (like oil or gold), indices and even cryptocurrencies. This provides traders with flexibility and the ability to tailor their strategies to different market conditions.
Unlike traditional stock ownership, CFDs allow you to control a position with a smaller initial investment. This can be particularly attractive for beginners who want to test the waters of financial markets without committing large amounts of capital.
Leverage is a defining feature of CFD trading. It allows you to control a larger position size than your account currency balance would typically permit. For instance, with 50:1 leverage, a $1,000 deposit could control a $50 000 CFD position. If your prediction about price movements is correct, this leverage can magnify your potential profits.
Unlike traditional stock ownership, where you borrow and repurchase assets to profit from short positions, CFD trading gives you the flexibility to open a short position directly on your trading account without borrowing. In this case, by shorting CFDs you can eliminate borrowing costs or stock lending fees. However, keep in mind that some types of CFDs also can not sell short, ask your dedicated manager for more information.
While trading CFDs offers several attractive advantages, it also comes with significant disadvantages that traders need to consider. It is of the utmost importance to be fully aware of the potential drawbacks of trading CFDs in order to develop a comprehensive trading strategy and manage risks effectively.
Leverage, a double-edged sword in CFD trading, can magnify not only profits but also losses. Imagine a trader with a $1,000 account using 10:1 leverage to open a CFD position on a stock. If the price moves against them, even a small price decline can result in a significant loss, potentially exceeding their initial deposit. To calculate the position size, beginners can use a forex calculator provided by Dukascopy. This can help to manage the risks wisely.
The convenience of leverage comes at a price. CFD brokers typically charge overnight financing fees for holding leveraged positions across several trading days. These fees can accumulate over time, especially for long-term positions, impacting potential returns. Traders need to factor in these fees when developing their trading strategies. For overnight rates and information, click here.
Financial markets are inherently volatile, and CFD positions are exposed to these fluctuations. Sudden price movements can quickly erode profits or exacerbate losses, especially for short-term trades. Furthermore, the spread (the difference between the buy and sell price of a CFD) acts as an additional cost for every trade. Frequent traders with short-term strategies may find these spreads to eat into their profits. Click here to see average spreads.
While CFDs may appear accessible at first glance, they can be complex instruments. Understanding factors like leverage, margin requirements and the various order types is crucial for informed trading decisions. For novice traders, the complexities involved could lead to miscalculations and costly mistakes.
To illustrate how CFD trading works, let's look at both a profitable and a losing trade example.
Suppose a trader believes that the price of EUR/USD will rise. He decides to open a long (buy) position in this currency pair. The current price of EUR/USD is 1.2000 and the trader decides to use leverage of 1:200. The trader has $1,000 in his account and wants to use $200 as margin.
Calculate profit:
Profit = (0.0050 x 33 333) = $166.67
The trader has made a profit of $166.67, doubling his initial margin investment. This example demonstrates how leverage can increase profits in CFD trading.
In another scenario, suppose the trader believes that the price of GBP/USD will go down. He decides to go short (sell) on this currency pair. The current price of GBP/USD is 1.4000 and the trader uses the same leverage of 1:200. The trader again deposits $200 as margin from his $1,000 account.
Calculate the loss:
Loss = (0.0100 x 28,571) =285,71
In this case, the trader loses 285,71 GBP, illustrating the risk of leverage in CFD trading. If the price had continued to move against the trader's position, the losses could have been much greater.
Участие в торговле на CFD является спекулятивным и может привести к значительным убыткам, которые могут превысить ваши вложения. Потенциальные убытки, теоретически, могут быть неограниченными.
CFD trading is a high-risk investment. The use of leverage can magnify both profits and losses, and the spread reduces potential returns. The market is complex and prone to misjudgment, so caution and a strong understanding of the risks are crucial.
The most suitable CFD trading platform varies based on individual requirements. Popular options include MetaTrader 4 (MT4) for its intuitive interface and advanced trading functionality, and MetaTrader 5 (MT5) for its additional features. Another recommended platform is JForex 4, offered by Dukascopy Bank, which provides access to advanced order types and automation capabilities.
CFD trading is illegal or severely restricted in some countries, including the United States, Hong Kong and Belgium. In the United States, the Securities and Exchange Commission (SEC) prohibits CFD trading for retail investors. In Hong Kong, the Securities and Futures Commission (SFC) restricts CFD trading due to the high risks involved. In Belgium, CFD trading on OTC instruments is prohibited for retail investors. Always check the regulations in your jurisdiction before considering CFD trading.