CFD : Cash for Diffrence
What are CFDs?
CFDs stand for Cash for Difference. CFDs are easier to trade or speculate in the financial markets without owning the particular underlying asset. In simpler terms, CFDs are a type of derivative product that enables traders to speculate on financial markets such as forex, indices, commodities, and digital currencies without ownership of the underlying assets. CFDs are a highly leveraged and cost-effective trading instrument. CFDs offer flexibility across a range of different markets and assets classes. A trader profits from price fluctuations by selling/ buying from the current price for a future price difference.
Difference between Futures and CFDs
- Futures trade through regulated exchanges. CFDs can be traded directly through a broker.
- Futures are less liquid compared to CFDs. It means orders get filled faster when required, ensuring profits and getting the pay-out you anticipated when you settle your trade.
- CFDs do not have an expiration date as Future contracts have an expiry date.
- Futures sometimes restrict the small traders because of the contract size and specifications.
How to use it
CFDs offer to trade in different markets like forex, commodities, indices, and digital currencies. CFDs are highly leveraged products, which are tradable on margin facilities. You need to pay only a percentage of the total trade while trading CFDs while the remaining amount is funded by your broker in the short term. This, allows traders to take much bigger trades to capitalize on the market movement with a lesser initial capital amount.
What are Leverage and Margin?
Leverage is the facility given by your broker to take a bigger position than the actual account size. For e.g, if leverage is 10:1, it means that if you have $1,000 in your account you can trade up to $10, 0000. Let's understand margin now, an initial minimum amount required to open the account or the amount required to take your first trade is known as Margin.
Spreads are the difference between the buy price (offer) and the selling price (bid). The offer (buying) price will always be higher than the bid (selling) price.
Scenario Trade position
The market is up against Long/Buy At the time of entry: 1800/1805 (Sell/Buy) Spread=5 At the time of closing: 1805/1810(Sell/Buy) Spread=5 The market is down Short/Sell At the time of entry: 1800/1805 (Sell/Buy) Spread=5 At the time of closing: 1795/1800 (Sell/Buy) Spread=5
In this example, the spread remains the same in any condition, whether the market moves up or down. But you tend to get benefits as per the assumption or market analysis in both market conditions.
Another CFD example:
Suppose: EUR/USD is trading at 1.13055/1.13155
You decide to buy €10,000 because you assume the price of EUR/USD will rise shortly
Let’s suppose EUR/USD has a margin rate of 3.34%, which means that you have to deposit 3.34% of the total CFD value as position margin. So, here your position margin will be (3.34%*[10,000*1.13155]).
Outcome A: Profit
Current Price: 1.13155/1.31255
The price has moved up 10 points (1.13155-1.13255)