How to start trading CFDs (Forex, Commodities, Indices and Shares) with FXTM?

Let’s find out what CFDs are, how they are used, and the risks and advantages of the instrument that opened the big markets to all investors.

CFDs have won an elite place in the world financial markets thanks to their versatility and speed of execution, allowing you to speculate on the price of thousands of assets including forex, commodities, indices, shares, crypto.

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What is CFD (Contract for Difference)?

Let’s start from the beginning, saying that CFD is the acronym of contract for difference.

It is an over-the-counter (OTC) financial product that allows you to benefit from fluctuations in the price of shares, commodities, indices, ETFs, and many other instruments, without actually taking possession of the asset in question.

In fact, CFD trading does not involve buying or selling the underlying, but only that two parties agree to exchange money based on the price changes of the same between when the contract is open and closed.

The two parties in question are called the buyer and seller and can be represented by the broker and the trader.

Unlike other types of contracts, CFDs do not expire, so positions can be closed at any time by placing an order opposite to that to open them.

We will then close a long trade with a sell order, and a short trade with a buy order.

What’s the difference between Forex and CFD markets?

How does CFD trading work?

Let’s now look at the more practical aspects of CFD trading.

The bureaucracy normally connected to the possession of the underlying is in this case practically eliminated, but there are still some concepts that it would be good to have clear before entering this market.

What is a CFD Contract?

Once we have chosen the trading platform and the instrument on which we want to trade, we open a position by clicking on Buy or Sell.

With this simple click, we sign a contract in which, against the advance of a margin, we reserve the right to issue a forecast on the future price trend.

Each CFD replicates the performance of the underlying financial asset.

If you believe that the price of the asset will increase, buy long-type contracts, which allow you to benefit proportionally to the rises.

On the other hand, if you think the price will decrease, take a bearish position by buying a short type contract.

In this case, your profit will be proportional to the decline of the stock.

Our compensation or loss will be equal to the difference between the buy and sell price, for the size of your position, minus the spread, which is due to the broker.

3 main merits of Online CFD Trading

Spreads and Commissions of CFD Trading

The spread is the difference between the sell and buy price of a certain instrument, and on platforms, it is often called bid/ask.

Its value is strongly influenced by the moment and the type of asset and tends to increase and decrease based on volatility.

The smaller the spread, the cheaper it will be to open a position.

In this specific case, FXTM only charges the spread costs for open positions, with no other fixed or hidden costs.

If we want to know the cost for a position just multiply the spread by the size of the position and we will know exactly how much it is.

We said that in particular FXTM only requires the spread to open a position, this means that there will be no conflict of interest between the broker and the trader.

If the broker’s compensation is represented by a minimum percentage of your earnings, this means that both of you will have every interest in establishing a long and profitable collaboration!

As a market maker, with its own dealing desk, FXTM is able to keep spreads at some of the lowest levels in the industry and offer both fixed and variable spreads.

If you want to know real-time prices, spreads, margins, and available leverage of FXTM assets visit the section dedicated to financial instruments.

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Rollover of CFD contracts

As mentioned, a CFD does not have a fixed expiration date and can be closed either by opening a contract in the opposite position or by leaving the position.

If we decide to leave a position open after the market closes, in particular after 11 pm CET, it automatically undergoes a rollover, i.e. renewal.

To find out more, visit FXTM’s section dedicated to rollovers.

However, there are also CFDs in the form of futures, which provide for a deadline after which the contract will no longer be valid and will be automatically replaced by a new one.

If you are not interested in keeping the position open overnight, all you need to do is close the position before the expected rollover date and time.

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Leverage and Margin of CFD trading

In FXTM’s section dedicated to trading for beginners, they have dedicated ample space to leverage, but in the specific case of CFDs, we could add that they have two types of margin: an initial margin, ie the amount needed to open a position, which is “frozen” as long as it remains open, and a maintenance margin that varies according to the market price and is applied if the price moves contrary to the investor’s position.

If to keep a position open you need a margin higher than that available, you will have to choose what to do between: increase it, close the position, let your broker close it for you, keep it open.

In addition, the broker could make a so-called margin call, if the maintenance margin gets too close to your equity.

Its purpose is to protect your equity, which is the total value of the positions you have opened minus the cost you paid to open them.

As a practical example, the spread for TESLA shares is only $0.20.

The actual cost to open a position of 10 Tesla shares is $0.20 x 10 = $2, while the open position would be worth around $9000 (without leverage, which could increase the amount that can be maneuvered).

The required margin will instead be:

Value on which you want to trade / Leverage

If you are looking for specific information on the leverage and spreads offered for all CFD instruments you can find everything on FXTM’s trading conditions page.

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The advantages of CFD products

Until twenty years ago, before the introduction of CFDs, the access doors remained closed to those who lacked significant capital, sometimes to be immobilized for a long time.

Suffice it to say that, for example, to buy a single Google share (Alphabet Inc.) you must have at least $750 and with a single share you would certainly not go very far.

Even for a day trader who does not intend to bind his money for long, a minimum deposit of $10,000 of the same local currency is required to purchase a single lot.

And even if it were possible to have these figures, the huge expenses and commissions charged for the opening and closing of traditional banks’ positions should still be considered.

Unlike other types of trading, CFD trading has truly unique implications, which depend on never getting hold of the asset.

Let’s take a closer look at them immediately:

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1. No physical properties

By not owning the underlying, you do not acquire any rights or obligations related to it, such as stamp duty or account management fees.

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2. Possibility of High Leverage

To open a position you need significantly less capital than that required by the purchase of the asset.

However, leverage has two sides and can increase both gains and losses.

Brokers such as FXTM require a minimum deposit of a few hundred euros, which will remain safe in the investor’s trading account and used as collateral for opening positions.

The levers offered by brokers allow you to open much larger positions than what your real capital would allow you to do.

Using the Google example we saw earlier, to control a position of $7500, equal to 10 listed Google shares $750 each, it is necessary to pay only a 5% margin or an amount of $375.

If at the purchase their value is $750, and we liquidate the position when the price is $780 (+ 4%), we will generate a profit equal to:

$30 x 10 shares = $300.

This means that with an initial investment of only $375 and a market movement in our favor of 4%, we can generate a profit of $300.

The same is true in reverse, therefore it is always wise to take appropriate risk management measures.

Note: Since July 2018, new guidelines from the European Securities and Markets Authority (ESMA) have changed the leverage FXTM can offer to its clients residing in the European Economic Area (EEA), including residents of the European Union ( EU) based on geographic restrictions, trader experience and desired asset class.

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3. Simplicity and Speed of Execution

CFDs are the basis of many short and very short time trading styles, such as day trading and scalping, as they allow you to close positions even after a few minutes.

Small price fluctuations can result in large returns or large losses, so it is nothing short of a duty to set stop losses and constantly monitor open positions.

FXTM’s biggest challenge, therefore, remains the management of asset volatility, and in this sense, a good economic calendar is recommended, and a study of the asset we want to trade.

What are CFDs (Contracts for Difference)?

4. Long or Short Trading

CFDs allow you to benefit from both the price increase and its decrease.

You will go long if you think that the price of the underlying will rise, and you will go short if you believe it will decrease: when you trade CFDs your profit depends solely on whether or not you will be able to correctly predict where the price will move.

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5. Possibility of Hedging

Hedging is a strategy that allows you to reduce the risks deriving from price fluctuations by carrying out two or more inversely correlated investments.

But let’s give an example immediately: you have chosen to get hold of a certain number of shares of stock because you believe that in the long run they could be a valid choice, but you fear that the market is about to go through a “passing crisis”.

To limit the losses caused by a possible drop in the price of your shares, then open a short position in CFDs, i.e. trade on the selling price of the stock.

If the price actually collapses, and the shares in your possession will lose value, but part of the losses will be offset by the CFD position that would prove to be a winner, while if the trend were positive, you would just close the CFD position.

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6. Consistency with the underlying asset

CFD trading is pure speculation on the price trend, and constantly follows the movements of the underlying, from which it deviates very little.

This allows you to study your trading plan exactly as you would any other market.

In the case of the stock market, for example, each CFD would correspond to one share.

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7. Wide range of assets

Through CFDs, you have access to a huge amount of markets, such as Forex, Indices, Stocks, Commodities, Cryptocurrencies, ETFs, Precious Metals, Government Bonds.

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