What are CFDs?
Have you ever asked yourself “what is a CFD”? CFDs stands for Contract for Difference. Trading CFDs is not about physically owning an asset instead, it is speculating on the price movement of the asset or financial instrument. This means that the trader can take advantage of price movement in value on various global financial markets. This includes indices, currencies, commodities and more. CFDs give greater trading freedom.
CFDs are trading on margin. It is a leveraged trading product. Leverage trading allows an investor to invest a small amount of money to open a larger position. This means that instead of paying the full value of the position, it only requires paying a percentage of the position. This percentage of position is called “initial margin”. Trading CFDs increases the buying power (BP). Thus, it maximizes the trading capital and potential profits.
On the other hand, it is important to take note that leveraged trading increases the exposure to risks as the losses equally increase if the trade is not advantageous. This is due to the fact that it is based on the full value of the position. There is a possibility of losing all the investment if the trader is a retail client. There is also a tendency for professional clients to lose more than their deposits and there may be a need to deposit additional funds to mend up their losses.
Leverage is like a broker that allows the trader to make most of its trading capital. For example, Trader A deposits $100 (USD) in a trading account to trade a CFD product having a 20:1 leverage. A $100 will allow Trader A to open a trade with an exposure of up to $2000.
Learning CFD trading is not only about asking “what is a CFD?”. Certain terms and other matters are also important. Let’s know more about the lot and types of CFDs that can be traded.
Lot
CFDs are traded on “lots” which is the size of the CFD trade. The value point per movement of one lot varies between each market when trading CFDs. For example, 1 lot of UK100 is equal to £1 while a lot of France40 is €1, and a lot of gold is 100 ounces.
In a trading example:
Trading 1 lot of UK100 contracts is trading the equivalent of £10 for each point movement. This means that for every point the market moves to the direction of the trade, it will gain £1 and the movement in the opposite direction will lose £1.
$1 (USD) movement in the price of gold is equal to $100 for every 1 lot. If a trader buys 1 lot of gold for $1000, the price moves to $1001, this will make him a $100 profit. On the other hand, if the value declines to $999, it will make a $100 loss.
Types of CFDs to Trade
CFDs can be traded on various global financial instruments. These are:
- Indices such as UK100, US500, Germany30 and Japan225
- Forex pairs including GBUSD, EURUSD, USDJPY and other minor and foreign currencies
- Individual shares traded in the stock exchanges (stocks/equities)
- Energy and Commodities including gold, silver, natural gas, oil, and coffee
