CFDs. Forex CFDs: What Are They? Why is it profitable to work with CFDs

By the way, Finmax was one of the first to react to innovations in trading on financial markets and implemented CFD trading on the same platform on which traders trade binary options.

Therefore, if you already have an account with this broker, then you do not need to open a new one, and if there is a deposit, then you can transfer it from binary to CFD with a couple of mouse clicks ...

CFD trading

To make it clearer and clearer, you can register and open a demo account with the Finmax broker using this link ... Does not oblige to anything, but you will see everything with your own eyes and touch your mouse -)

In fact, CFD trading is a mixture binary options and Forex... Let's just say - CFD contains the best of both markets. CFD contracts have take profit and stop loss, as in Forex trading, but they also have a kind of expiration, like in binary options.

But let's go in order ...

Profit calculation in CFD trading

A point (pips, pips), passed by the price, has its own price. The price of an item depends on:

1. From leverage. Finmax - from 1:50 to 1: 200;
2. Investment amounts. It is clear here that the larger the amount, the more expensive a pip will be;
3. From the final payment under the contract. Yes, it is possible to set a fixed payout amount at the time of the completion of the take profit transaction.

For example:

• With an investment of $ 50 with a leverage of 1: 200 and with a payout of $ 250, one point passed by the price will cost $ 0.72;
• With the same investment, with the same payout, but with a leverage of 1:50, one pip will cost only $ 0.23

It would seem, what is the trick? There is only one payout, but the point value is different?

The fact is that, although stop and profit are present in CFD trading, it is not possible to set them manually.

Therefore, the higher the value of a pip, the closer the take profit will be. The smaller the final payment under the contract, the closer the take profit will be. Stop loss, respectively, too.

And vice versa.

Here I think, okay? Roughly speaking, if 1 pip is worth $ 1, and the payout on the contract is $ 250, therefore, the profit will be placed at a distance of 250 pips from the trade entry point. Which is actually normal for trading even on a short-term basis.

On the other hand, if you choose a payout of $ 250, and the pip value is $ 0.5, then the take will be placed at a distance of 500 points.

And the leverage determines the multiplier of your investment. The higher the leverage, the larger the amount of the contract will be opened, the higher the value of a pip will be.

Probably difficult to understand if you don't look directly at the platform? -) Further, on the screen everything will be clear ...

Well, and the most a big plus in CFD trading is that a trader can close a deal under a contract at any time as well as an order in Forex.

However, it should be borne in mind that if, when closing a contract by take profit or manually, with a profit, the investment amount plus the amount accumulated from profitable points is returned to the balance, then in case of a loss, the trader loses both the investment and the negative points!

How to trade CFDs

You can carefully examine the screen (increases when pressed):

• Centered, above the graph, available assets. If you click on the star to the right of the asset, then you add it to your favorites. Then all your favorite assets can be quickly found in the drop-down menu "All assets".
  For those who like to play with crypto, cryptocurrencies are listed on a separate line in the menu and are traded 24/7;
• Open / closed positions are displayed on the left (more on them below);
• On the right is your trade menu.

In the trade menu:

1. Your account type. Those who have demo mode will indicate that this is a training account;
2. Equity- your deposit. Unlike binary options on CFDs, when trades are open, the deposit changes along with the price movement;
3. Open P&L- total profit / loss for all open trades. If no contracts are open, P&L is zero;
4. Leverage... On currency pairs from 1:50 to 1: 200, on cryptocurrencies only two leverage are available - 1: 5, 1: 6;
5. Investment- starting from $ 25. Take Profit- the closing price of the transaction. Selected in the drop-down menu in increments of $ 50-100;
6. Pip value- I wrote above what it depends on. Transaction amount - depends on the choice of leverage. For example, 1: 100 with an investment of $ 50 = 5,000. And with the same leverage, with an investment of $ 100, the transaction amount will be $ 10,000;
7. Purchase(price increase contract) - the current price of the asset. S / L - stop loss, T / P - take profit;
8. Sale(for a fall) - the same as for item 7;
9. Below is the "Trade" button (it did not appear on the screen).

First of all, it should be understood that CFD trading is not fundamentally different from trading Forex or binary options.

Therefore, it is worth studying the strategies that are laid out in abundance in this section, choose the most suitable one for yourself and, for a start, work on a training account!

A signal appears, go to the already open and prepared Finmax platform and open a CFD contract for an increase or decrease by consecutive pressing of the Buy / Sell and Trade buttons.

After that, your open contract will be displayed on the left side of the platform, and in the drop-down menu you can see all the information on it.

Working with open CFD contracts

By clicking on the checkbox of the drop-down menu to the right of the asset of your contract, the following information will open:

• Deal code. By the way, if you have any questions or problems on opening / closing contracts, then you should indicate this code when contacting the support service;
• Transaction time. As you can imagine, this is the time when you signed the contract;
• Closing. As I wrote above, a kind of expiration. If by the date and time specified here the contract is not closed by TP or SL, then it will close automatically, regardless of profitability or loss;
• Sum. Your investment in a CFD contract;
• Leverage. I think it's understandable too;
• Opening price. In case you forget;
• S / L - stop loss if you made a mistake with the forecast;
• T / P - take profit - the price at which your contract will be closed with a profit;
• Spot price - at what price the contract can be closed manually.
• CLOSE THE DEAL - By clicking on this button you can close the contract manually at any time.

However, it should be borne in mind that the spot price will be several pips lower than the real price. This is a kind of spread that the broker takes for an early closed trade.

If you remember from the previous article, CFD contracts are concluded between two traders. At the end of the contract, one trader pays the other the difference in price. In case of early closure of one of the parties, a penalty is taken from it.

As you can see, everything is extremely simple. And, if you know how to trade, it is profitable -)

And finally, how to transfer funds from binary options to CFDs, if someone needs:

To the right of the name, there is a checkmark in the drop-down menu. There you can switch between options / CFDs, and there is also a "Wallet" item.

Trading with CFDs is unambiguously comfortable, moreover, this is usually relevant for a variety of participants in the stock market, it is envisaged to conduct multiple transactions for the purchase and sale of securities, sometimes services, with a small amount of cash. First of all, you need to figure out what it is about.

The CFD, with the abbreviated name CFD, is considered the most rational exchange instrument that helps you make quick money with a little free finance, it does not limit users to property aspects.

A colossal number of exchange transactions are carried out as CFDs. Taking into account that incredible profits are generated on CFDs, and they turn out to be the cause of the crisis in the economy, being able to interact is the main indicator of every trader, both a beginner and an experienced specialist.

How does it work?

In ordinary commercial relations between the parties, at the time of the purchase and sale of products, a standard agreement is signed, due to which, during the transaction, the rights to the property will be transferred to the other party.

This situation is rational when trading specific financial instruments, that is, a variety of securities. When discussing derivatives, obviously, trading is for conditions.

Among the advantages are:

1. Classic leverage... The trader has a chance to interact with finances that clearly exceed the amount of his personal coverage. For a successful start, it is important to deposit the amount requested by the broker. The remaining necessary funds are provided as a kind of loan.
2. Large number of assets... CFD trading involves interaction with a huge selection of financial instruments, from currency pairs to stocks. It is quite possible to diversify your personal portfolio thanks to different core assets.
3. Chance to hedge risks, because CFDs are often used as a tool that insures risks in the market, in parallel with options, as well as futures.

The parties officially sign an agreement, one of its conditions says about the rise or fall in the value of certain securities and assets.

As soon as this happens, the difference between the primary price and its designation in the potential future is transferred to the buyer, sometimes to the seller, subject to the fulfillment of the contractual conditions. Moreover, the shares remain the same owner.

Based on information from Wikipedia, CFDs appeared in the early 90s in England. At that time, the parties in the market did not have the means to buy or sell securities. The authors of the CFDs that are currently known are John Wood and Brian Keelan.

The main goal they pursued was to insure risks, taking into account acceptable, institutional trading on the London Stock Exchange. Fresh contracts showed really excellent efficiency due to the fact that the margin for trading was at the proper level, taxes were not paid, the securities were with the owners.

A little later, such contracts were available to ordinary traders, their prevalence increased significantly due to certain local companies. Thanks to this, these trading instruments entered other markets around the world and actively spread.

CFDs on shares

In this case, shares are considered the primary assets. The peculiarity of such contracts is really simple, it is extremely important to calculate whether the difference between the current value and the potential price of an asset will turn out to be, moreover, any trend, with a positive or negative preponderance, is taken into account. The same applies to stock indices.

This asset provokes increased interest among depositors. If the market currency is available to almost everyone (meaning initial deposits of $ 50-100), then shares can be priced at $ 50-200 per unit, with the smallest package of 10-100 units, and the smallest deposits from brokers trading in stocks on the stock exchange are from 5 thousand dollars.

Important aspects

The main difference lies in the fact that at the time of CFD trading, the most valuable security is not bought. As a result, it will not be possible to manage part of the enterprise. In principle, this is a disadvantage, but at the same time it is an advantage, because the trader does not have any special obligations.

Another advantage lies in the fact that it is unrealistic to quickly make money on a decrease in the price of shares, without thinking exclusively about their growth, it is only important to buy a SELL CFD contract.

Trading CFDs provides for margin bases. It turns out that the broker provides a leverage to the trader, thus increasing his personal potential for trading. Naturally, small commissions are almost invisible, it is also profitable to work with CFDs.

The main task of the investor in the current situation is to make a forecast for fluctuations in the quotes of the underlying asset. It turns out, taking into account the available analysis tools, it is extremely important to assume what the cost will be over time.

Probably, every trader at least once met the abbreviation CFD.

But if you ask what this means, then in most cases the answer will be something like this: "This is something similar to Forex, only for stocks."

In principle, it sounds close to the truth, but there are some nuances. We will talk about them in this article.

What is CFD

CFD, Contract For Difference(Russian contract for price difference) is a kind of transaction between a buyer (usually a trader) and a seller (broker), which provides that one party will pay the other the difference between the current value of the asset and its value at the time of the transaction. Who will pay is determined by comparing the direction of the actual price movement with that which was agreed in the contract.

Based on the definition, it can be assumed that a contract for difference (CFD) is used mainly for speculative profit, as well as for hedging.

CFDs refer to financial derivatives. This means that its main goal is not to physically obtain the underlying asset, but, as mentioned above, speculative profits. For example, when buying a CFD on coffee, no one will ship coffee to your warehouse, as would happen with a futures contract after its expiration.

Let's try to finally figure out what CFD contracts are using an everyday example.

CFD on the example of a dispute in a bar

Imagine that you and a friend are sitting at a bar, relaxing after a day of work. Here the news is on TV and you see a report that the ruble, in connection with the successful monetary policy of the Central Bank, began to strengthen. You, being a trader, understand that, to put it mildly, “they are being bullied”. Next, hitting the table with your fist, start the following dialogue with your friend:

You: Yes, by the New Year, the ruble will be more than 80 rubles per dollar, and they are here talking about strengthening.
Comrade: And I believe in the monetary policy of our Central Bank and I think that the ruble will continue to strengthen.
You: Let's bet that in the end I'm right !?
Comrade: Lets do it!
You: If by the New Year the ruble continues to fall, then you will pay me a tenfold difference between the current exchange rate and what will be. And if the ruble strengthens, then I will pay you a tenfold difference. Deal?
Comrade: Deal!

Now imagine that you are a trader and your friend is a broker. That is, he acts as a counterparty for your transaction. As a result, one of you will make a profit and the other will make a loss. And who exactly depends on the movements of the underlying asset rate, that is, the ruble in this example.

Moreover, the deal can be closed not necessarily by the New Year, as in the dialogue, but at any time that the trader wishes.

It should be noted that all settlements on this dispute will be carried out after its completion. That is, at the time of the dispute itself, you only made a contract without any delivery of the underlying asset.

Now about what you can conclude a contract for the difference in prices.

What are the CFD instruments

Considering that CFDs are a "dispute" between a trader and a broker, you can bet on almost anything:

• CFD Forex (currencies);
• CFDs on commodities (oil, gas, cookies);
• CFDs on shares;
• CFDs on metals;
• etc.

Moreover, CFDs on shares are the most popular.

By the way, we recently made a review of the Xtrade trading platform, which specializes in CFDs, and so, the total number of instruments available for trading in it was almost 900 units. Starting with shares of American companies and ending with unknown Polish companies.

The popularity of CFDs stems from the fact that you do not need to purchase the stock to speculate on stocks. In addition, the margin requirements (from 2%) are much lower than in the same stock market. Well, do not forget that contracts for difference can be bought with a fractional amount of lots from the standard one, for example 0.1.

Another distinctive feature of this type of derivatives is that the total amount of liabilities on it is not related to the total amount of the underlying asset circulating in the market. That is total number of contracts CFD for the shares of a certain company, there may be several times more than the number of issued shares.

The next stage of the dispute is its completion, that is, the moment when the trader decided to close his trade. And then the question immediately arises, at what rate to close the deal?

Where do CFD quotes come from?

The value of the contract changes following the value of the underlying asset without any deviations.

Thus, CFDs are traded at indicative quotes taken from the respective exchanges. For currencies, quotes come from the Forex market, for stocks - from the stock exchange, etc.

Other trading parameters:

• Spread is present, usually fixed. That is, the difference between Bid and Ask is always the same.
• Commission, usually absent or included in the spread.
• Execution of transactions instant and in theory should be no slippage... Considering that the underlying asset is not being delivered, there is no need to draw liquidity from the market, the lack of which provokes slippage.
• Requotes are possible.

Overall, CFD trading has a number of distinct advantages that have greatly increased the popularity of this type of financial instrument over the past few years. But there are also disadvantages.

Advantages and disadvantages

Pros:

Huge selection of tools... There are CFDs for almost all possible financial instruments. It is the best choice for diversification lovers.

Large leverage... CFD provides an opportunity to work with a much higher leverage (up to 1: 500) than in the stock market. This ensures low margin requirements - from 2%. Depending on the underlying asset (eg stocks), margin requirements can be up to 20%, but no more. This allows traders with little capital to enter markets previously inaccessible to them.

Access to all markets from one platform... Most CFD brokers offer instruments from all global markets. This means that traders can easily trade in any global markets from a single trading platform.

No restrictions on short positions... Some markets have rules that prohibit short trades at certain times or require a trader to borrow an asset before entering a short position. The CFD market usually has no restrictions on short positions and you can go short at any time without additional costs.

Commission-free execution... As mentioned above, trades are executed instantly and often without any commissions.

No restrictions on day trading... Again, some markets have capital restrictions on day trading, CFDs do not.

Minuses:

Poorly suited for scalpers... All costs are included in the spread, which, in principle, will prevent you from making quick deals and making money on the smallest fluctuations. For example, the spread on EUR / USD can be as high as 30 pips versus 5-16 pips in the Forex market.

Weak regulation... CFDs are not as regulated as the stock market, so only trusted brokers with good reviews should be trusted. Although, when compared with the Forex market, the differences are minimal.

Where to trade CFDs

The CFD seller does not need to own a specific amount of the underlying asset. This means that any forex broker, if desired, can connect CFD instruments to their terminal.

Most brokers do this in principle. However, for them it is a business insofar as, therefore, they do not pay special attention to details. Which is what you are most likely to see on the graph.

Let's take an example:

If we compare two charts from different brokers, we can see that in the Xtrade platform, which specializes in CFDs, the chart is smoother with smaller ones. And in Alpari, whose main profile is currencies (Forex), there are certain problems in the form of "holes" in the chart.

Perhaps, in the first case, they preferred a more expensive provider of quotes for this type of derivatives.

If you are seriously thinking about trading CFDs on stocks, then you should give preference to a specialized broker whose main profile is CFDs.

P.S. If you have something to add on this topic or some nuance was not fully disclosed, write your thoughts in the comments.

CFD in translation from English means “contract for difference” and is a contract concluded by two parties - a buyer and a seller. The essence of the contract is that the positive difference between the opening and closing prices of a certain financial instrument is paid by the seller to the buyer, and the negative difference is paid by the buyer to the seller. The contract also stipulates the time at which this difference is determined.

CFD example

By definition alone, it is difficult to immediately understand what a CFD is, so it is easier to give an example. Let's say a trader bought 1 mini Dow Jones CFD at 10,400 pips and sold this contract at 10,700 pips. Thus, the difference between the opening and closing of the index was 300 points. The trader's profit, with the cost of one contract $ 5, was 5 * 300 = $ 1500. If the index did not rise, but fell by 300 points, then the trader lost $ 1,500 on this trade.
At first glance, it may seem that CFD trading is not very different from regular currency pair trading. Although CFDs are a mechanism for trading the underlying asset, the underlying asset itself does not participate in trading. This is what allows the trader not to work in the financial instrument market, but to extract the same financial result.

The essence of CFDs

CFDs were invented by English brokers who decided to interest clients in trading stocks without paying a special tax. Formally, a CFD transaction was not a share transaction and was not subject to tax. Then CFD became an ideal tool for those who did not have the opportunity to enter the market, for example, due to lack of funds.

Having studied CFDs in more detail, I saw a lot of positive aspects in this instrument. It turned out that in some cases the use of CFDs is more profitable and more convenient than trading the underlying asset itself. What are the advantages of CFDs?

Small capital

The main advantage of CFDs is the reduced trading capital requirement. This reduction is carried out due to the fact that the need to pay tax and commission for the supply of goods, inclusion in the register of shareholders, as well as other fees that are paid when trading shares, disappears. In addition, CFD trading allows the use of leverage. By trading with financial leverage, you can significantly increase your initial capital, but such trading involves a lot of risk.

Hedging

There are many financial instruments, the movement of which is highly correlated. This property has become actively used in hedging. Due to the fact that CFDs are both buy and sell, these contracts can also be used for hedging. Often, traders use locks and hedges only to protect their deposit in the event of an incorrect market forecast. However, hedging can also be used to generate profits. If the movement of two financial instruments is very similar, then you can open a long position on one instrument, and a short position on the other. The profit will be given by the difference in the course of these instruments or a positive swap. For example, currency pairs such as EUR / USD and USD / CHF are highly correlated. If you open a buy on these two instruments at the same time, then the probability of losing part of the deposit is very low, since these pairs depend on each other, and the movement of EUR / USD, for example, upwards will entail a fall in USD / CHF. The profit will be due to the fact that the "swing" of the move of one of these pairs is stronger.

Convenience

I was glad that most of the dealing centers offering CFD trading allow you to work with these contracts in the same terminal as in Forex. This is very convenient, since learning a new program is a waste of time, but working with a familiar platform is more pleasant and productive. For example, I am very accustomed to the MetaTrader terminal, therefore, when working on other platforms, I often make technical mistakes that negatively affect trading. In addition, a wide selection of markets for CFD trading allows you to work with both currencies and various stocks.

Cons of CFDs

The main disadvantage that I noticed in almost all dealing centers was the large spreads on CFDs. Therefore, strategies based on small price changes are generally not applicable to CFDs. Naturally, the spread decreases the profit and increases the loss. Thus, avoiding the commission that is paid when trading stocks, you are faced with high spreads. Also, CFD traders cannot be shareholders.

Conclusion

Summing up, we can say that CFD trading is not convenient for all traders. Of course, having a small capital and a desire to work with stocks, choosing CFDs is almost ideal. But in the absence of problems with funds, trading CFD contracts does not make sense. Traders with large deposits are better off using futures and options.

When choosing a CFD, every trader must weigh the pros and cons. If large spreads, leverage, risk, and other considerations pay off, then CFDs provide an excellent alternative for some types of trading. When work on the exchange is directly feasible, and the deposit allows the use of the underlying asset, it is better to replace CFDs with other financial instruments.
And, of course, the main thing in the work of traders is the availability of profit, no matter what financial instrument it is earned with. I wish it to you!

Interestingly, there are assets that change at a lower rate than currencies, but also allow for tangible returns. Moreover, they allow us to form an effective investment portfolio, within which we can work with completely different instruments.

We bring to your attention a new way of investing - trading contracts for differences in the prices of shares of some of the largest companies in the world.

A Contract For Difference (CFD) is a financial instrument that allows you to trade assets such as the shares of many large companies, gold and oil, gas and nickel, cocoa and cotton. This is necessary in order to enable private investors to prove themselves in this segment of the financial market.

The main distinguishing feature of CFDs is that when trading CFDs for CFDs, there is no real delivery of the instrument for which the transaction is made. Trader buys CFDs on shares, and then necessarily sells them, making a profit from the price change itself. The advantage of contracts for difference is that at any time you can conclude a deal in full, for example, for shares, which is rather difficult to do when trading "natural" exchange contracts.

How to make money on the shares of large global companies without owning them?

Trading CFDs on stocks is based on the usual principle of work on FOREX. However, when working, the investor gains access to a higher level of financial instruments. Using the principle of margin trading, the investor has the opportunity to operate with not such high amounts as, for example, in the exchange.

An additional difference between CFD trading on shares is that it is tied to exchange sessions, where shares periodically change their owners, and, as a result, quotations. Accordingly, the difference between the predicted by the trader and their real price will be profit or loss.

Consider a price difference contract with a general example: You buy a CFD on 400 Microsoft Corp shares at $ 50 per share, expecting their value to go up. After a while, you sell them for $ 52. Accordingly, the price difference payable will be 2x400 = 800 US dollars.

We can look at Apple as one of the most relevant examples. Since the beginning of this year, quotations of its shares have risen by 9.45% to $ 352. The reasons for this growth are, firstly, the growth of the entire American stock market against the background of the recovery of the American and world economies, and secondly, the soft monetary policy of most central banks. Indeed, the Dow Jones is up 8.8% since the beginning of the year.

Secondly, Apple shares were supported by the announcement in January of the CDMA version of the iPhone 4 smartphone. And if our clients bought CFDs on Apple shares, investing only 5% of the share value (the maximum leverage when trading CFDs on shares is 1 to 20) with a deposit of $ 1000 from the beginning of 2011, they could earn 30.8% of the deposit.

Apple stock growth chart since 2005

Obviously, investors have no doubts about the future of the company. A number of analytical agencies raised their forecasts from $ 375 to $ 450 by the end of 2011. And this allows us to hope that this dynamics will allow traders to make money on CFDs.

We remind you that the conditions for trading CFDs with FOREX CLUB are distinguished by low margin requirements and commissions, floating spreads, as well as the ability to hold a position indefinitely.