An introduction to CFDs. ( Contracts for Difference), and CFD Trading.
- What are Contracts for Difference? (CFDs)
- What is “spread” or “a spread”?
- The hidden costs of trading
- What is margin?
What are Contracts for Difference? (CFDs)
CFDs can be a flexible and cost effective way to trade a wide range of financial markets.
The contract mirrors the performance of the underlying instrument, offering all the benefits of trading the underlying instrument without having to physically own them. With CFDs you can buy if you think the price of a financial instrument will rise and you can sell if you think the price will drop, therefore it is also possible to profit from a fall in the price of the underlying instrument
What is “spread” or “a spread”?
When you view the price of an instrument you will see a sell price and a buy price.
Usually, the price to the left is the ‘sell price’ (bid) and the price to the right is the ‘buy price’ (offer). The difference between these two prices is the spread so in this example the spread is 0.25.
These bid/offer spreads are also used when trading Shares or exchanging Currency.
It means that if you bought and sold one unit you would buy at the higher price and sell at the lower price, and so ‘lose’ the spread.
The tighter the spread, the less attrition cost you will suffer from trading in and out of positions.
The hidden costs of trading
When you trade a lot, as you often do with trading, be careful of the spread, as this can wear down your capital quicker than you think. It’s like being the blind in poker.. and having to through in chips all the time (for more info on poker try www.pokerplayerx.com)
What is margin?
CFD products are usually traded on margin.
Margin is an efficient way to use your capital as instead of paying the full value of your position you are only required to pay a percentage deposit. the level depends on the instrument you are trading, and the trading platform and ranges from 1% – 10% of your total position value.
However, losses will also be magnified so margin trading is not necessarily for everyone. So you really need to work out some exampls of what happens to your trades, and how a small move impacts your pl.
Also be careful as a small trade can leave you owing a lot more money than you realise, so be smart.. don’t be the rabbit.