What is CFD’s?
A CFD, or Contract for Difference, is an agreement between two parties to exchange the difference between the opening price and closing price of a contract.
CFDs are derivatives products that allow you to trade on live market price movements without owning the underlying instrument on which your contract is based.
You can use CFDs to speculate on the future movement of market prices regardless of whether the underlying markets are rising or falling. You can go short (sell), allowing you to profit from falling prices, or hedge your portfolio to offset any potential loss in value of your physical investments. Moreover, with over 10,000 markets to trade, you can gain exposure to markets you may not have had access to before. We offer prices on shares, indices, currencies, commodities and more.
Contracts for Differences (“CFDs”) products were developed to allow customers to enjoy all the benefits of holding a Stock, Index, ETF or Commodity position without having to physically own the underlying instrument. A customer enters a CFD at a quoted price, the difference between that price and the price of the CFD when the position is closed is settled in cash, hence the term “Contract for Difference” or CFD.
+For equities, one CFD is equivalent to one share. For a shares index or commodity, one CFD is equivalent to one contract of the underlying asset. For example, one CFD on the Dax 30 trading at a price of 6000, equals a position size of €6000, and for every one point movement in the Dax 30 you make or lose €1.
Let’s run through a few examples of different markets to illustrate how they work.
How to trade CFD?
Let’s say that UK company, Barclays, has a dealing quote of 100- 100.1 pence. You would sell at the bid price (100) or you would buy at the offer price (100.1). The spread is the difference between the two prices, which is 0.1 pence in this example.
Let’s say you expect the share price to rise and you decide to use CFDs rather than traditional share dealing to back your view. You buy at 100.1.
BUY PRICE – 100.1 SELL PRICE = 150.1 PROFIT/LOSS 50 pence
It turns out that you’re correct and the underlying price of the shares does rise. The new quote price is 150.1 (bid) – 150.2 (ask) and you decide to close out your buy trade through selling at the bid price of 150.1. This gives you a gain of 50 pence on each share you held.
For equities, one CFD is equal to one share. If you had bought and sold one CFD, this would be the same as buying and then selling a single share. So, buying and selling one CFD in this example would give you a profit of 50 pence. If you bought and sold 100 CFDs, then your profit would be £50 (equivalent to 100 shares).
Link to a video “how to trade CFD” Click Here