What are CFDs?
“Contracts for Difference” (CFD) is a popular type of derivative product. Trading CFD’s enables investors to exploit profits on the price movements of the underlying financial assets, such as shares, indices, forex, treasuries and commodities.
Instead of owning the actual asset (e.g. physical shares, currency pairs, or commodities), CFD’s are an agreement to exchange the price difference of the underlying asset from the time that the contract is opened to the time it’s closed. Even though the investors never actually own the asset, they exploit benefits when the price moves in their favour, and vice versa.
CFD’s are leveraged, which means that only a small percentage of the full value of the position will be needed to be deposited as capital. This is known as trade on margin. On one hand trading on margin will magnify investors’ return, however on the other hand losses are magnified when there’s a losing trade.
It is possible that the losses are bigger than the initial capital the investors have put in.
Benefits of trading CFDs
With trading CFD’s, no matter where the price goes (up or down), you can get benefit either way by buying (going long) or selling (shorting) the product. CFDs are commonly used as a way of hedging the existing portfolios. CFDs can be trade on margin (leveraged), a way to exploit bigger profit with limited capital.
For example, to buy the equivalent of 100 CFD shares of the US100 Index with Rockfort Markets, you may only need to deposit 1% of the total position value that you might have to pay if you were buying physical shares from a stock broker.
If each share cost $6,952 then you would only need to deposit $6,952 of position margin with us (1% of $695,200 = $6,952), spreads exclusive.
| GOING LONG US100 INDEX | |
|---|---|
| Price |
Bid US 6.9400 Ask US 6.9500 |
| Enter Trade | Buy 1000 shares at US 6.95 per share |
| Margin Required |
US $6950.00 Margin = Number of shares x price x margin rate (10%) |
| Profit Scenario |
After entering the trade, US100 Index rallies to US 8.56 over the next few days at which point you decide to close out your trade. Gross Profit = US $1,610 8.56 (Sell Price) – 6.95 (Buy Price) = 1.61 1.61 x 1000 = $1,610 |
| Loss Scenario |
If US100 Index decreases in value over the life of your trade. You close the position at US 5.80 Gross Loss = -US$ 1,150 5.80 (Sell Price) – 6.95 (Buy Price) = -1.15 -1.15 x 1000 = -$1,150 |
About Forex
The Forex marketplace is the largest and the most liquid market in the world and has contributed to the ease of global travel, trading online efficiency, and instant international communication. The world is becoming smaller, and the need to exchanging different currencies is becoming more and more needed all the time. Currencies are traded against each other more and more often which has made the forex trading market grow at a fast pace and become more responsive and dynamic. The forex market is open 24 hours every business day with no central marketplace.
Trading with Leverage on
Trading with leverage enable investors to gain a larger exposure to a market with a relatively small deposit by borrowing capital. This is the way that investor’s profits can potentially be multiplied, for profit as well as loss. Investors can obtain some of the lowest margin rates (highest leverage) in the forex market, which is an extremely attractive proposition to investors that like to trade with leverage.
Way to Leverage Function
Trading leverage (trading on margin) will magnify investors’ profit if the price moves in investors’ favour, however, there is a potential that investors lose the initial deposit if the price move against investors’ favour. Any profits and losses are based on the full value, not the deposit amount, which could be a lot higher. At Rockfort Markets, our lowest margin rate is 1%, also can be referred to as ‘100:1 leverage’. This indicates that investors can open a position worth up to 100 times more than the initial deposit investor put in when the trade first opened.
Each underlying asset will have a bid price and an ask price. To buy a contract over the underlying asset (go long on the contract), you will buy at the offer price multiplied by the contract size. If you sell a contract over the underlying asset (go short on the contract), you will sell at the bid price multiplied by the contract size.
For example
If a EUR/USD currency pair is quoted at 1.12751/1.12765:
To buy EUR, you would buy at 1.12765 x contract size; and
To sell EUR, you would sell at 1.12751 x contract size.
In this example, the difference between the two prices is the ‘spread’. Clients can use the online platform to see all orders, open positions, profit and loss reports and statements at any time. As this shows real time profit and loss results, clients are able to use this information to determine whether they wish to close their positions. As soon as a position is closed, any resulting funds can then be used as deposit for further positions.
| LONG EUR/USD | |
|---|---|
| Price |
Bid 1.12751 Ask 1.12765 Spread 1.4 |
| Enter Trade |
Buy 1 standard lot (€100,000) at 1.1276 BUY €100,000 and simultaneously SELL US$112,765 |
| Margin Required |
Using leverage of 1% you will only need to deposit €1,000 (€100,000 x 1% = €1,000) to open this position. |
| Profit Scenario |
After entering the trade, the EUR/USD then rallies over 100 pips to 1.1386 at which point you decide to close out your trade. Gross Profit = £1,098.87 1.1376 (Sell Price) – 1.1276 (Buy Price) = 0.0110 0.0110 x 100,000 = $1,100 Convert to EUR, 1,100/1.1276 = €1,098.87 |
| Loss Scenario |
The Euro decreases in value over the life of your trade. You close the position at 1.6358.
Gross Loss = -€364.93 1.1235 (Sell Price) – 1.1276 (Buy Price) = -0.0041 -0.0041 x 100,000 = -$410 Convert to EUR, 410/1.2235 = €364.93 |