CFD trading is an easy and convenient way to trade on the international markets. It is also a flexible alternative to other types of trading, giving you access to multiple markets from a single account. CFDs are traded on margin so you can enter the market with only a fraction of the actual capital needed. You can use CFDs to speculate on the future movement of market prices, regardless of whether they are rising or falling.
Contracts for Difference (CFDs)
A Contract for Difference (CFD) is an agreement between two parties to exchange the difference between the current value of an asset and its value at the buy/sell time. It is a product which allows you to profit from the price movements of shares, indices, futures, and other financial instruments, without actually owning them – there is no physical purchase of the asset. This means that if you buy CFDs on Vodafone shares, for example, you do not acquire the actual shares. Nevertheless, you can profit from the difference between their buy and sell prices.
Features of CFD Trading
Going Long or Short
CFD trading allows you to profit from both rising and falling markets. You buy (go long) if you think prices will rise, or sell (go short) if you think prices will fall.
If you think that an asset will experience a loss in value, you can use CFDs based on it. So your profits will rise in line with any fall in that price of underlying asset. The more market prices move in the direction you anticipated, the more profit you will make. The more they move in the opposite direction, the greater your loss will be. So it’s you who decide how long to keep a position open.
Margin trading (also called leverage effect) is the ability to control more funds (borrowed from your broker) than the amount of your deposit, in order to increase the potential return of an investment. Contracts For Difference can be traded on margin.
A margin of 5% (or a leverage of 1:20), for instance, allows you to trade with £10,000 by having just £500 (5% margin) in your account. This means that you can take advantage of the smallest market movements by controlling more money than you actually own.
While leverage can be advantageous in increasing your profits, it can also significantly increase your losses, so it should be used with caution.
If you believe your current portfolio may lose some of its value, you can use CFDs to compensate for this loss by short selling.
For example, if you hold £10,000 worth of Barclays shares, you can short sell the equivalent of £10,000 worth of these shares through a CFD trade.
In case Barclays share price falls by 5%, the loss in value of your share portfolio would be compensated by a gain in your short sell CFD trade. Many traders use CFDs to hedge their portfolios, especially in volatile markets.
One of the major advantages of CFD Trading is the lower trading costs, as opposed to traditional share trading. Not only are CFDs traded on margin, thus requiring a fraction of the full cost to open a position, but also the minimum amount to open a CFD trading account is lower.
For instance, Forex Brokers imposes no minimum requirements for opening a trading account. In fact, you can start trading with whatever amount you feel comfortable with. This way, you can test your trading strategies without the need to invest a large amount of money. In any case, your funds are protected according to the rules imposed by the Financial Services Compensation Scheme (FSCS) – up to £50,000. Forex Brokers participates in this fund in order to ensure the maximum protection of clients’ money.
The commissions, if any, associated with CFD trading are lower than the commissions paid for trading on a stock exchange. For example, if you purchase CFDs on shares of HSBC Holdings valued at, say, £3,000, you would pay a commission of only 0.10%, or £3 (the commission for trades above €10,000 is 0.05% of the trade value). Because the margin requirement is 5%, you would be required to have only £150 in your account to open that position.
Trading CFDs on margin involves another typical cost: paying interest when you leave your position open at the end of the trading day (also known as a rollover fee). The amount of this cost is determined mainly by the prime interest rate of the state in whose currency the base asset is denominated, plus/minus the premium/financing determined by the broker. Thus, it is possible that in some cases you will receive interest for open positions, rather than pay it.
Forex Brokers also offers CFDs traded on 100% margin, also called “Cash CFDs”. By opening a cash CFD position, you pay the full cost of the underlying asset (without borrowing money from your broker), so no rollover fee is charged for such positions. This type of trading is very close to trading actual shares, with the benefit of lower costs and no minimum amounts required to enter the market, because the minimum number of CFDs you can buy is one.
Although you are not actually purchasing the base asset, when the issuer company announces payment of dividends, this will be reflected in your account as a dividend payment. If you are holding a long position, your broker will pay you a dividend, while if you are holding a short position, the amount of the dividend will be withheld from your account.
CFD Trading Platform
Forex Brokers desktop CFD trading platform offers enhanced flexibility and a full set of professional features to investors looking to trade on the international markets. Once installed on the computer, the platform can be further customised to ensure the best trading experience.
With Forex Brokers you have access to trading over 1,000 CFDs on Shares, Indices, Futures, and Exchange Traded Funds (ETFs).