Contracts for Difference (CFDs) started back in 1999. Before Contracts for Difference (CFDs), overseas stocks weren’t commonly available, and the main disadvantage of trading stocks was that you couldn’t easily trade on the falling market. To trade on the falling market a trader had to first borrow shares at interest before he could sell them. Ultimately, it is the investor that has the market risk and the obligation to refund stock and to pay interest. Contracts for Difference (CFDs) don’t have these disadvantages Contracts for Difference (CFDs) allow traders to gain on both directions of the market. Investors and traders can make money 24 hours a day on foreign currency Contracts for Difference (CFDs) from anywhere in the world.
What is a CFD?
A CFD (or Contract For Difference) is simply an agreement to settle the difference in value of a particular currency pair or share between the time at which the contract is opened and the time at which it is closed.
A CFD is a Contract For Difference between buy and sell prices of the instrument. This difference is based on the trading volume of the underlying instrument. It means, for example, that instead of buying and selling physical gold or currencies without delivery, the trader will be paid or charged by an amount that based on the trading volume and the buying and selling prices.
Another way to the financial markets
CFD trading essentially allows you to trade on a huge range of markets without taking delivery of the underlying instrument, and make a potential profit if the market goes down, as well as up.
For example, you could trade on the price of Gold without taking delivery of any Gold, or on the price of a stock without buying or selling the stock.
Share CFD trading is very similar to normal share dealing in two respects. You deal at the cash price of the share, and pay a commission which is calculated as a percentage of the value of the transaction. For example, our commission rate for major shares you can see at www.paxforex.com
Trade on Margin
With CFD trading you do not have to pay for the full value of the position you have chosen. Instead you put up a deposit, or margin, from just 0.2% when using a Trading Account. This means you can trade up to 500 times your initial capital.
Follow your Trading plan
When you close your position, the difference between your opening contract value and your closing contract value is realized. As just as with buying currency pares or trading futures, the degree to which you are correct in your CFD trading affects how much you earn or lose.
One key benefit of trading CFDs is that you do not incur any stamp duty, as you are not making a physical purchase.
Margin products like CFDs can help you make the most effective use of your investment capital, but it is important to appreciate that the amount you could lose relative to your initial investment is greater for margin products than for non-geared products.
Buy - Go Long; Sell – Go Short
With CFDs you can buy or sell at the quoted price, to profit from rising or falling markets. Other methods of shorting shares and other markets are often inconvenient and expensive.
CFDs can be used to trade an extremely wide range of financial products, like: currency pairs in FOREX (foreign exchange), Shares, Metals and futures.
For example, if you have an interest in shares, the price of oil and the exchange rate of the dollar against the euro; you can deal all of these markets with one CFD provider on one account.
Trader does research and believes that the price of MMM Company will go UP. Before the closing of the trading day, the trader decides to go Long (Buy) and buy1 lot at a price of 42.04. The trader just bought 100 shares (common lot size).
After 44 days, the trader gets a signal from his trading strategy to close the open MMM position at 59.15. On this deal the trader made 1 706.82 USD with initial investments 420.40 USD in 44 days.
Account currency: USD
The MMM specification:
One Lot size: 100 shares (Quantity of shares in one lot)
Used Margin: 10%
In order to make a deal, the trader must have 10% of lot size multiply by current price of underling instrument
Our Example: 10% * 100 (lot size) * 42.04 (price) = 420.40 USD.
Amount that trader pays for the deal.
Our Example: 0.1% (Commission) * 100 (lot size) * 42.04 (price) = 4.21 USD
The deal details are:
Number of lots: One
Open Date: 09.03.2009
Open price: 42.04
Close Date 11.05.2009
Close Sell price 59.15
Result in pips: 17.11
59.15 (Sell price) - 42.04 (Buy price)=17.11 pips)
Result in currency: 1 711.00 USD
17.11 X 100 (Result in pips * lot size)= 1 711 USD
To make this deal the trader must have 420.40 USD
10%*100*42.40 (Used margin* lot size * price) = 420.40 USD
In 44 days the trader made 1 706.82 USD with 420.40 USD (Used margin) investments!!!
Calculation of result: Result in currency minus commission
1 711.00 USD (Result in currency)- 4.21 USD (commission) = 1 706.82 USD
You can also “go short” with CFDs, meaning that you can enter a sell transaction and profit on the falling market.