Contract for Difference (CFD) is a popular and specialised form of financial derivative trading. CFDs enable traders to speculate on the price movement of fluctuating global financial markets, such as shares, indices, currencies, bonds and commodities, without actually owning the underlying asset.
Think of CFD trading as financial contract that’s settled in cash as opposed to via the buying and selling of the asset (a physical share, for example). This means that you can trade on margin, buying and selling units based on how you anticipate the price will change. Of course, this affords traders a great deal of flexibility against price movements and changes to the value of the contract.
As mentioned, contracts for difference (CFDs) are traded on margin. This means that only a small percentage of the full value of the trade is required to secure an open position. For example, if you have a CFD trade worth £2,000 (either in a short or long position) and your provider’s margin requirement is 3%, this would mean you only need £60 to open the position.
Trading on margin has its pros and cons. On one hand, you can open positions larger than what your capital allows and can therefore magnify your returns. Of course, this increased leverage means that your losses will be magnified, too. Bear in mind, your losses are based on the full value of the CFD position and, as such, you could lose more capital than the small percentage that you deposited.
There are three costs involved in CFD trading: the spread, holding costs, and commission.
Whereas traditional markets expose the trader to fees, regulations and commissions, CFDs skim traders’ profits through spread costs (the difference between the buy and sell price) which must be paid on entry and exit. A narrow spread indicates that the price only needs to change slightly in order for you to start making a profit. But, if the price moves against you, you’ll suffer a loss. Luckily, Hantec Markets offers some of the tightest spreads in the market.
At 5 PM New York time, open positions in your account could be charged a holding cost. Whether this cost is positive or negative depends on the direction of your position and the applicable holding rate.
To calculate the holding costs use the following formulas:
On a buy position:
(Units x opening trade price x holding rate buy) / 365 x Hantec Markets currency conversion rate
On a sell position:
(Units x-1 x opening trade price x holding rate sell) / 365 x Hantec Markets currency conversion rate
When trading share CFDs, you must also pay a separate commission charge. But at Hantec Markets, we offer low, highly competitive rates.
For those of you who have an existing portfolio of physical shares, you can hedge against investment risk using CFDs. For example, if you think your shares may lose value in the short-term, you could short sell the shares as CFDs and make a profit from the short-term downtrend. That way, if share prices do fall, the loss in value of your physical share portfolio will be offset by the profit you made short-selling. Once the value of the physical shares begins to rise, you can close out your CFD position.
Hantec Markets offers a choice of over x CFD markets, including:
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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
70% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.