What is CFD and how do you trade it?
CFDs are probably something you've heard very little of or have no idea at all of, and it's a bit more difficult to understand than even Forex, so in this article, we'll break it down for you,
and we'll show you what a CFD is, and how you trade it!
What is it?CFD stands for Contract for Difference, and it's an agreement where two parties exchange the difference between the opening and closing price of a contract. Because a CFD is a derivative product, you never actually own the article or asset you choose to trade, but if the market moves in your favor, you still gain a profit.
CFDs are interesting as you can potentially gain if the market moves up or down, so as long as you predict where it goes. If you think an asset's price is going up soon, you can 'go long'(Also known as a buy position, but we'll use more commonly used terms here). if you think the asset's price will go down, it's the opposite-'going short'. It's not quite so simple, as you will make a profit if it goes in the direction you pick, but it also depends how much it moves in that direction.
If you think one market is going up, say you buy a CFD in order to trade it, and 'go long'. If the market goes through the roof, you make a huge profit, but if it crashes, you lose a lot. The same can be said for the opposite- if you think the market will go down, and it does, you make a profit, but if it goes up, you lose. Of course, CFDs have an advantage over traditional stock trading with convenience and cost. Almost anything can be traded through CFDs, including stock indices, which cannot be traded directly.
ExampleLet's look at Canada Y38J. It's currently trading at 2.33/2.34, where 2.33 is the sell price and 3.33 is the buy. If you've read our last articles, spread is calculated by the sell and the buy price, so the spread here would be 1.
You decide to go short on Canada Y38J, and you buy 5 CFDs at .54 per CFD(also known by some as units). A commission charge will be applied to the trade, specifically 0.0027, since 0.10% of 2.7 is 0.0027. Y38J has a margin rate of 1%, so you only need to deposit 1% of the total value of the deposit as position margin. In this example, the position margin would be 0.027.
At the closing price, Y38J has moved to 4.34, which means it's moved 1.00 in your favor. Your profit would therefore be 5.4, minus the commission charge of 1, which means you've made 4.4! Losses are also calculated using this algorithm.