The CFD (“Contract for Difference”) is a popular form of derivative trading. A client does not take physical ownership of the underlying asset, but cfd trader enables him/her to speculate on the rising or falling prices of financial instruments such as shares, indices, commodities, and currency pairs.
With CFD trading, the client does not buy or sell the underlying asset (e.g. a physical share). The client buys or sells some units for a particular financial instrument depending on whether the client thinks prices will move up or down.
- The Company offers CFDs on a wide range of global markets and our CFD financial instruments include:
- currency pairs,
- commodities and
- stock indices such as the S&P 500, DAX, UK 100, etc.
Short and long CFD trading
CFD trading enables you to speculate on price movements in either direction. So while you can mimic a traditional trade that profits as a market rise in price, you can also open a CFD trader position that will profit as the underlying market decreases in price. This is referred to as selling or ‘going short’, as opposed to buying or ‘going long’.
Leverage in CFD trading explained
CFD trading is leveraged, which means you can gain exposure to a large position without having to commit the full cost at the outset. Say you wanted to open a position equivalent to 500 Apple shares. With a standard trade, that would mean paying the full cost of the shares upfront. With a contract for difference, on the other hand, you might only have to put up 5% of the cost.
While leverage enables you to spread your capital further, it is important to keep in mind that your profit or loss will still be calculated on the full size of your position. In our example, that would be the difference in the price of 500 Apple shares from the point you opened the trade to the point you closed it.
That means both profits and losses can be hugely magnified compared to your outlay, and that losses can exceed deposits. For this reason, it is important to pay attention to the leverage ratio and make sure that you are trading within your means.
Leveraged trading is sometimes referred to as ‘margin trading’ because the funds required to open and maintain a position – the ‘margin’ – represent only a fraction of its total size.
When trading CFD trader, there are two types of margins. A deposit margin is required to open a position, while a maintenance margin may be required if your trade gets close to incurring losses that the deposit margin – and any additional funds in your account – will not cover.