Forex Cfd Meaning

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What is a contract for difference?

A contract for difference (CFD) is a popular form of derivative trading. CFD trading enables you to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies and treasuries.

CFD trading explained

Some of the benefits of CFD trading are that you can trade on margin, and you can go short (sell) if you think prices will go down or go long (buy) if you think prices will rise. CFDs are tax efficient in the UK, meaning there is no stamp duty to pay*. You can also use CFD trades to hedge an existing physical portfolio.

Introduction to CFD trading: how does CFD trading work?

With CFD trading, you don’t buy or sell the underlying asset (for example a physical share, currency pair or commodity). You buy or sell a number of units for a particular instrument depending on whether you think prices will go up or down. We offer CFDs on a wide range of global markets and our CFD instruments includes shares, treasuries, currency pairs, commodities and stock indices such as the UK 100, which aggregates the price movements of all the stocks listed on the FTSE 100.

For every point the price of the instrument moves in your favour, you gain multiples of the number of CFD units you have bought or sold. For every point the price moves against you, you will make a loss.

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What is margin and leverage?

CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade in order to open a position. This is called ‘trading on margin’ (or margin requirement). While trading on margin allows you to magnify your returns, your losses will also be magnified as they are based on the full value of the CFD position.

What are the costs of CFD trading?

Spread: When trading CFDs you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favour before you start to make a profit, or if the price moves against you, a loss. We offer consistently competitive spreads.

Holding costs: at the end of each trading day (at 5pm New York time), any positions open in your account may be subject to a charge called a ‘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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Market data fees: to trade or view our price data for share CFDs, you must activate the relevant market data subscription for which a fee will be charged. View our market data fees

Commission (only applicable for shares): you must also pay a separate commission charge when you trade share CFDs. Commission on UK-based shares on our CFD platform starts from 0.10% of the full exposure of the position, and there is a minimum commission charge of ВЈ9. View the examples below to see how to calculate commissions on share CFDs.

Please note: CFD trades incur a commission charge when the trade is opened as well as when it is closed. The above calculation can be applied for a closing trade; the only difference is that you use the exit price rather than the entry price.

What instruments can I trade?

When you trade CFDs with us, you can take a position on over 10,000 CFD instruments. Our spreads start from 0.7 points on forex pairs including EUR/USD and AUD/USD. You can also trade the UK 100 and Germany 30 from 1 point and Gold from 0.3 points. See our range of markets

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Example of a CFD tradeВ

Buying a company share in a rising market (going long)

In this example, UK Company ABC is trading at 98 / 100 (where 98pence is the sell price and 100pence is the buy price). The spread is 2.

You think the company’s price is going to go up so you decide to open a long position by buying 10,000 CFDs, or ‘units’ at 100 pence. A separate commission charge of £10 would be applied when you open the trade, as 0.10% of the trade size is £10 (10,000 units x 100p = £10,000 x 0.10%).

Company ABC has a margin rate of 3%, which means you only have to deposit 3% of the total value of the trade as position margin. Therefore, in this example your position margin will be ВЈ300 (10,000 units x 100p = ВЈ10,000 x 3%).

Remember that if the price moves against you, it’s possible to lose more than your margin of £300, as losses will be based on the full value of the position.

Outcome A: a profitable trade

Let’s assume your prediction was correct and the price rises over the next week to 110 / 112. You decide to close your buy trade by selling at 110 pence (the current sell price). Remember, commission is charged when you exit a trade too, so a charge of ВЈ11 would be applied when you close the trade, as 0.10% of the trade size is ВЈ11 (10,000 units x 110p = ВЈ11,000 x 0.10%).

The price has moved 10 pence in your favour, from 100 pence (the initial buy price or opening price) to 110 pence (the current sell price or closing price). Multiply this by the number of units you bought (10,000) to calculate your profit of ВЈ1000, then subtract the total commission charge (ВЈ10 at entry + ВЈ11 at exit = ВЈ21) which results in a total profit of ВЈ979.

Outcome B: a losing trade

Unfortunately, your prediction was wrong and the price of Company ABC drops over the next week to 93 / 95. You think the price is likely to continue dropping so, to limit your losses, you decide to sell at 93 pence (the current sell price) to close the trade. As commission is charged when you exit a trade too, a charge of ВЈ9.30 would apply, as 0.10% of the trade size is ВЈ9.30 (10,000 units x 93p = ВЈ9,300 x 0.10%).

The price has moved 7 pence against you, from 100 pence (the initial buy price) to 93 pence (the current sell price). Multiply this by the number of units you bought (10,000) to calculate your loss of ВЈ700, plus the total commission charge (ВЈ10 at entry + ВЈ9.30 at exit = ВЈ19.30) which results in a total loss of ВЈ719.30.

Short-selling CFDs in a falling market

CFD trading enables you to sell (short) an instrument if you believe it will fall in value, with the aim of profiting from the predicted downward price move. If your prediction turns out to be correct, you can buy the instrument back at a lower price to make a profit. If you are incorrect and the value rises, you will make a loss. This loss can exceed your deposits.

Hedging your physical portfolio with CFD trading

If you have already invested in an existing portfolio of physical shares with another broker and you think they may lose some of their value over the short term, you can hedge your physical shares using CFDs. By short selling the same shares as CFDs, you can try and make a profit from the short-term downtrend to offset any loss from your existing portfolio.

For example, say you hold £5000 worth of physical ABC Corp shares in your portfolio; you could hold a short position or short sell the equivalent value of ABC Corp with CFDs. Then, if ABC Corp’s share price falls in the underlying market, the loss in value of your physical share portfolio could potentially be offset by the profit made on your short selling CFD trade. You could then close out your CFD trade to secure your profit as the short-term downtrend comes to an end and the value of your physical shares starts to rise again.

Using CFDs to hedge physical share portfolios is a popular strategy for many investors, especially in volatile markets.

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An Introduction to CFDs

The contract for differences (CFD) offers European traders and investors an opportunity to profit from price movement without owning the underlying asset. It’s a relatively simple security calculated by the asset’s movement between trade entry and exit, computing only the price change without consideration of the asset’s underlying value.   This is accomplished through a contract between client and broker and does not utilize any stock, forex, commodity, or futures exchange. Trading CFDs offers several major advantages that have increased the instruments’ enormous popularity in the past decade.

Key Takeaways

  • A contract for differences (CFD) is an agreement between an investor and a CFD broker to exchange the difference in the value of a financial product between the time the contract opens and closes.
  • A CFD investor never actually owns the underlying asset but instead receives revenue based on the price change of that asset.
  • Some advantages of CFDs include access to the underlying asset at a lower cost than buying the asset outright, ease of execution, and the ability to go long or short.
  • A disadvantage of CFDs is the immediate decrease of the investor’s initial position, which is reduced by the size of the spread upon entering the CFD.
  • Other CFD risks include weak industry regulation, potential lack of liquidity, and the need to maintain an adequate margin.

How a CFD Works

If a stock has an ask price of $25.26 and the trader buys 100 shares, the cost of the transaction is $2,526 plus commission and fees. This trade requires at least $1,263 in free cash at a traditional broker in a 50% margin account, while a CFD broker requires just a 5% margin, or $126.30.

A CFD trade will show a loss equal to the size of the spread at the time of the transaction. If the spread is 5 cents, the stock needs to gain 5 cents for the position to hit the break-even price. While you’ll see a 5-cent gain if you owned the stock outright, you would have also paid a commission and incurred a larger capital outlay.

If the stock rallies to a bid price of $25.76 in a traditional broker account, it can be sold for a $50 gain or $50/$1,263 = 3.95% profit. However, when the national exchange reaches this price, the CFD bid price may only be $25.74. The CFD profit will be lower because the trader must exit at the bid price and the spread is larger than on the regular market.

In this example, the CFD trader earns an estimated $48 or $48/$126.30 = 38% return on investment. The CFD broker may also require the trader to buy at a higher initial price, $25.28 for example. Even so, the $46 to $48 earned on the CFD trade denotes a net profit, while the $50 profit from owning the stock outright doesn’t include commissions or other fees. Thus, the CFD trader ends up with more money in their pocket.

Indices Trading

Broaden your trading opportunities

Product Bid Ask Typical
Australia 200
China 50
France 40
Germany 30
Japan 225
UK 100
US SP 500
Wall Street

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Last Updated:

Market Name Spread pricing Min. spread Trading Hours Margin from
Australia 200 CFD*/td> Fixed 1 point 24 hours with breaks 0.50%
EU Stocks 50 CFD Fixed 2 points 07:00 – 21:00 0.50%
France 40 CFD* Fixed 1 point 07:00 – 21:00 0.50%
Germany 30 CFD* Fixed 1 point 24 hours with breaks 0.50%
Hong Kong 50 CFD Fixed 10 points 02:15 – 16:45 with breaks 1%
Japan 225 CFD* Fixed 8 points 24 hours with breaks 0.50%
US SP 500 CFD* Fixed 0.4 points 24 hours with breaks 0.50%
US Tech 100 CFD* Fixed 1 point 24 hours with breaks 0.50%
UK 100 CFD Fixed 1 point 24 hours with breaks 0.50%
Wall Street CFD Fixed 1.6 points 24 hours with breaks 0.50%
China 50 CFD Variable around market spread 10 points (variable) 2:00 – 21:45 1%
Italy 40 CFD Fixed 10 points 08:00 – 16:40 1%
Netherlands 25 (per 0.05) CFD Fixed 0.3 points 07:00 – 21:00 1%
US Small Cap 2000 CFD Fixed 0.3 points 24 hours with breaks 1%
Singapore Index (per 0.1) CFD Fixed 0.4 points 00:30 – 20:45 1%
Spain 35 CFD Fixed 8 points 08:00 – 19:00 1%
Switzerland 20 CFD Fixed 4 points 07:00 – 21:00 1%
Market Name Spread Pricing Min. spread Trading Hours Margin from
Australia 200 CFD* Fixed 1 point 24 hours with breaks 0.50%
EU Stocks 50 CFD Fixed 2 points 07:00 – 21:00 0.50%
France 40 CFD* Fixed 1 point 07:00 – 21:00 0.50%
Germany 30 CFD* Fixed 1 point 24 hours with breaks 0.50%
Hong Kong 50 CFD Fixed 10 points 02:15 – 16:45 with breaks 1%
Japan 225 CFD* Fixed 8 points 24 hours with breaks 0.50%
US SP 500 CFD* Fixed 0.4 points 24 hours with breaks 0.50%
US Tech 100 CFD* Fixed 1 point 24 hours with breaks 0.50%
UK 100 CFD Fixed 1 point 24 hours with breaks 0.50%
Wall Street CFD Fixed 1.6 points 24 hours with breaks 0.50%
China 50 CFD Variable around market spread 10 points (variable) 2:00 – 21:45 1%
Italy 40 CFD Fixed 10 points 08:00 – 16:40 1%
Netherlands 25 (per 0.05) CFD Fixed 0.3 points 07:00 – 21:00 1%
US Small Cap 2000 CFD Fixed 0.3 points 24 hours with breaks 1%
Singapore Index (per 0.1) CFD Fixed 0.4 points 00:30 – 20:45 1%
Spain 35 CFD Fixed 8 points 08:00 – 19:00 1%
Switzerland 20 CFD Fixed 4 points 07:00 – 21:00 1%

*These products have out-of-hour spreads that are wider than the minimum spread. View the Market Information Sheets in the desktop platform for details.

Key benefits of trading indices

Diversify your portfolio

Improve your trading potential

Take advantage of market movement

Broaden your trading opportunities

Trade with confidence

Keep a finger on the pulse of the markets

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Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

Contracts for Difference (CFDs) are not available to US residents.

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