In the late 1990s, CFDs were introduced to retail traders.
They were popularized by a number of UK companies, characterized by innovative online trading platforms that made it easy to see live prices and trade in real time.
The main role of CFD before was “hedging the risks of falling prices”.
As no one could have earned any benefits from falling prices of stocks, indices and commodities, there were financial companies who have found business opportunity in CFD product.
It was around the year 2000 that retail traders realized the real benefit of trading CFDs. This was the state of the growth phase in the use of CFDs.
The CFD providers quickly expanded their offering from London Stock Exchange shares to include indices, many global stocks, commodities, bonds, and currencies.
Trading index CFDs, such as the ones based on the major global indices e.g. Dow Jones, NASDAQ, S&P 500, FTSE, DAX and CAC, quickly became the most popular type of CFD that were traded.
Now CFD is very easy to trade online for anyone through Online Forex & CFD brokers.
Stocks, Indices, Commodities, Precious Metals and Energies, they are all tradable online.
How does CFD work?
When trading in CFDs you can trade in 2 directions.
This is possible because the broker or financial companies are counter-ordering clients’ orders.
CFD is traded between two parties as follows:
Investors ⇔ Financial Brokers
The system is very simple. If an investor sells a stock CFD, the financial broker buys the same stock CFD and the same volume, and vice versa.
Unlike the actual underlying assets, you will be trading with only your broker and that’s how CFD works.
Opening a “Long” position refers to opening a buy CFD position to profit from a price increase.
This implies that you are expecting a rise in the asset’s price and will use a sell order to close your position.
Opening a “Short” position refers to opening a sell CFD position to profit from a price decrease.
This means that you are anticipating the asset’s price to fall and will use a buy order to close your position.
The quote comprises the bid price and the offer price. The difference between these prices is known as the spread.
If you think a market is set to rise, you but at the offer higher price, if you think the market is set to fall, you sell at the bid lower price.
1. Low Commissions –CFD Advantage-
One reason why investors trade stocks, indices and commodities are the low fees charged by financial brokers.
Comparing to other agencies where you can trade the actual underlying assets, you can save a lot of fees by trading the same financial instrument in a form of CFD.
Such as intermediary commissions, delivery fees and custody charges.
Only fees that you need to pay when you trade CFD is the “Spread Charges” by your financial broker.
Spread is the difference between bid and ask prices. The spread varies by each financial broker.
It may be a few hundreds of dollars you need to pay by trading a Stock, but it is only a few dozens of dollars in a form of CFD.
2. High Leverage -CFD Advantage-
For CFDs, trades are conducted on a leveraged basis or a Margin which means a given quantity of capital can control a larger position, amplifying the potential for profit or loss.
Unlike the trading of actual underlying assets, you can trade larger trading volume in a form of CFDs.
A typical feature of CFD trading is that profit and loss and margin requirement is calculated constantly in real time and shown to the trader on screen.
Up to 1:100 Leverage
The leverage provided to traders for trading CFDs are not like 1:2 or 1:5. In fact, it is the average leverage provided for traders of stocks, indices and commodities.
But if you are trading such financial instruments in a form of CFD, you can benefit from much higher leverage.
Some financial brokers even offer up to 1:100 for CFD trading.
For example of Stock CFDs, you can start trading with only a few hundreds of dollars.
The maximum leverage provided for traders are different depending on each financial broker.
3. No Expiration Date -CFD Advantage-
There is no expiry date for CFD product. Closing a CFD position only happens if you manually close it by ordering it.
Once the position is closed, the difference between the opening and the closing trade is paid as profit or loss.
A CFD is effectively renewed at the close of each trading day and rolled forward if desired. This is the standard conditions of many financial brokers.
You can keep you position open indefinitely, providing there is enough margin in your account to support the position.
CFD will roll-over to the next Contract
Note that even though the CFD does not expire, any positions that are left open overnight will be “rolled-over”.
This typically means that any profits and loss is realized and credited or debited to the client account and any financing charges are calculated.
The position that carries forward to the next day.
The rate of interest charged or paid will vary between different brokers and is usually set at a % above or below the current LIBOR “London Inter Bank Offered Rate”.
The swap charge is also known as dividend paid for the holders of the underlying assets. So in this case, if you have long position, you will get paid for the dividend and vice versa.
Of course, there are swaps which you will be charged by holding a long position.
Price Gaps between Contracts
With many financial brokers, CFD contracts will be rolled over to the next contract and there is no expiration date. Holding a position for a longer period isn’t a problem when trading CFDs at all.
Although you may need to be aware of the price gap between each contract.
As it is often that the closing price of the existing CFD contract and the opening price of the upcoming contract are different.
So when your positions are rolled over to the next contract, you might see a big profit or loss added to the unrealized profit/loss.
This “Price Gap” also happens when trading Foreign Exchange too.
IronFX
Comment by Diletta
March 26, 2024
Awesome bonuses, good leverage. A few hiccups, but support rocks!