CFD – Contract For Difference

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There is a new opportunity for all traders out there and that opportunity are CFDs or contract for differences. The rise of online investing options so far was mostly marked by binary options, but online trading market is always developing. So now we have new instrument for trade – CFD.

What is CFD – Contract For Difference?

CFDs are simply new kind of options for traders to invest in. They can be traded online, so you can make money from your sofa. In its basics contract for differences is futures contract. CFDs provide investors with all benefits and risks of owning a security without actually owning it. CFD represents contract that can be traded between trader and a broker, who are exchanging the difference in the current value of currency pair, commodity, index or share and its value at contract’s expiry.

How Does CFD Trading Work?

When trading CFDs trader can go short(sell) if he/she thinks price of underlying asset will go down or go long (buy) if he/she thinks price of underlying asset will go up. CFDs are also widely used to hedge an existing investment in shares, commodities or currency pairs.

When trading CFDs trader is not buying or selling underlying asset. Trader is actually buying or selling a number of units for particular instrument depending on whether trader thinks prices will go up or down. For every point the price of chosen instrument moves in traders favor trader gains multiples of the number of CFD units trader has bought or sold. On the other hand if the price moves against the trader, trader will accumulate loss. It is important to know that when trading CFDs losses can exceed trader’s deposits.

Important Terms

Margin – often referred to as margin requirement, it represents a small percentage of the full value of the trade that trader needs to spend in order to open a position. This is because CFDs are leveraged product.

Leverage – Trading on margin can greatly amplify trader’s returns but it also amplifies potential losses as they are based on the full value of the CFD position. That’s why trader can lose more than any capital deposited. Leverage involved borrowing money from the broker. Leverage can greatly increase trader’s profit, but it can also cause huge loss.

Spread – difference between the buy and the sell price. Trader must pay spread to open position. Trader enters buy trade using the buy price and exit using the sell price.

Holding costs – if trader doesn’t close position before the end of trading days he/she must pay holding cost. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.

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