CFD Trading: How does it work?

beggers December 30, 2017 0
CFD Trading: How does it work?

CFD (Contract for difference) is a common form of derivative trading. It enables you to speculate on the falling prices or rising prices of global financial instruments like indices, currencies, commodities, treasuries, and shares.

With this kind of trading, you can actually trade on margin. If you suspect that the prices will go down, you can actually go short and sell. If you feel that the prices will increase, you can go long and buy. This article will help you learn more about this type of trading. Know more about the four concepts behind contract for difference trading below:

 

  1. Spread and Commission

In most cases, contracts for different prices normally come in two prices: the selling price and the buying price. This is actually a price at which a trader can open a relatively short CFD. On the other hand, people commonly use the buy price to mean the price at which one can open a relatively long CFD.

Moreover, the difference between the selling price and the buying price is the spread. Sell prices are always lower than the market price and the buying price tends to be higher than the current market price. The spread generally covers the cost of opening the CFD position. In a nutshell, this means that the selling prices and the buying prices will attune to reflect the actual cost of creating a trade.

  1. Deal Size

CFDs are usually traded in standardized contracts. In most cases, the size of a contract varies with the asset being traded. It mimics the current value of the concerned asset in the market. CFD is generally closer to the market trading compared to other derivatives such as options and spread bets.

  1. Duration

One can usually close CFD trades by simply placing them in the direction opposite to the ones that opened them. For instance, one can only close a buy position on five hundred contracts of gold by selling five hundred contracts of gold.

Traders who retain the daily contract for difference positions open even after the trading has been closed. In most cases, the cost of the charge usually relates to the amount used when opening the leveraged trade.

However, this is not always the case especially when it comes to forward contract. This type of contract tends to have an expiry date. Its funding charges are always placed in the spread.

  1. Profit and Loss

After calculating the loss or profit earned from a CFD, the deal size of the particular position is usually multiplied by the actual value of the contract. Usually, you multiply the acquired figure by the figure acquired by finding the difference in points amid the price in the opening and in the closure of the contract.

Final Thoughts

If you really want to make a better return for your money, CFD trading can be a good investment for you. Some of the good things about this kind of trading are that it has easy access to global markets, lower margin requirements, and little to no fees. CFDs offer good alternatives for particular kinds of traders like long-term and short-term investors.

 

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