What is a CFD Contract
What is a Derivative?
A Derivative product is a financial instrument whose current price is based on another asset (underlying asset). This underlying asset may be a Forex Currency, a World Stock, Energy Asset, Precious Metal, Stock Index, etc.
What is CFD Trading?
CFD trading is nowadays the best way to trade any financial market. Low-cost trading, wide asset selection, high capital leverage, minimum deposit requirements, and extremely easy-to trade platforms make CFD contracts very popular among traders. Here are the basics of CFD trading but first let’s see what is a Derivative Asset.
What is a CFD Contract?
CFD means Contract for Difference and it is an OTC (over-the-counter) derivative product. When you open a CFD position you gain or lose money based on the price of the underlying asset. CFD contracts are very and can be used for trading any Financial Market including Forex, Stocks, Commodities, etc. CFDs enable traders to trade very easily a great variety of assets in very tight spreads.
While other derivative instruments use complicated formulas to determine their current values, CFD prices are identical to the underlying asset prices. That means that if you buy Crude Oil using a CFD contract you will buy and sell it almost at the same price as the current Crude Oil Price. That makes extremely easy to trade and to monitor your CFD positions.
Financing charges (Spreads and Commissions)
Almost all CFD brokers charge only a spread between Bid and Ask and no trading commissions. Usually, you can trade EURUSD in less than 2 pips spread, trade Dow Jones in 2 points spread, trade DAX in 1.8 points spread, etc. If you keep your positions after midnight, your position may be subject to overnight charges (SWAP Rates) but if you trade CFDs on Futures you pay no SWAP rates at all. That makes CFDs ideal for Swing Trading of 1-2 months.
How Can you Make a Profit via Trading CFD Contracts
Your profit/loss when you trade CFDs can be easily calculated. Simply, if the price of the underlying asset has risen between the time you have opened your position and the time you have close it, you have made a profit. If the price of the underlying asset has fallen below, then you suffer a loss.
Advantages when Trading CFDs
(1) Great Variety of Trading Assets are available as underlying assets (100s of Forex assets, 100s of world shares, tens of Indices, tens of commodities)
(2) Accessibility from everywhere (Web Platforms, Mobile Platforms, Pad Traders, etc.)
(3) Tight Spreads and no trading commissions charged
(4) Zero-Swap overnight charges when you trade CFDs on Futures
(5) Easy to short-sell any share or any Forex Currency (cross currencies and exotic currencies, including Bitcoin)
(6) Ability to trade very small positions and leverage your trades 50:1 and even 500:1
(7) You may trade CFDs using advanced charting capabilities and you may trade CFD assets even on the popular MetaTrader4
(8) You may use automated software (robot) to trade CFDs
(9) No physical settlement is required
(10) You may open an account by selecting within tens of CFD brokers and usually take advantage of a bonus promotion (up to 100%)
(11) You may trade CFDs in a practice account almost in all CFD brokers
(12) While other derivative instruments use complicated formulas to determine their current values, CFD prices are identical to the underlying asset prices. That makes trading easy even for beginners.
Five (5) Types of CFD Contracts
There are 5 main types of CFD contracts:
(A) Forex CFDs (Foreign Exchange CFDs)
CFDs may trade any Foreign exchange asset including less popular currency pairs (crosses and exotic currencies). The Forex market is very liquid and that means that trading currencies via CFDs is cost-effective (low-spreads). You may trade Forex Currencies 24 hours a day, 5 days a week (24/5).
(B) Commodity CFDs: Commodity CFDs enable trading in tens of energy assets, precious metals, and popular commodities. The spread when trading popular assets like crude oil is very tight. For example, via a CFD on Futures, you can trade crude oil at 5 points spread while you pay zero-trading commissions and zero-swap overnight rates.
(C) Index CFDs
You can trade tens of different indices including of course the main US Indices (Dow-30, S&P-500, Nasdaq) plus many European Markets (DAX, FTSE, CAC-40, etc.) plus indices from Asia and Australia.
(D) Share CFDs
Trade any share from any country at very tight spreads and by using very high capital leverage.
(E) Interest rate CFDs
Interest rate CFDs offer access to a market that most traders don’t even know what it is. Interest rate securities can be traded simply for speculation or for hedging against interest rate risk.
■ What is CFD Trading?