CFD Trading – Fundamental Concepts Every Starter Must Know

CFD (Contracts for difference) is flexible way of trading, which mirrors price movements of the underlying assets that includes global financial products such as treasuries, currencies, commodities, indices, and stocks. The concept is very simple.

 

A CFD trader neither purchases nor sells underlying asset. The trader simply purchases units of the CFD. You profit when price of the underlying financial product goes up and make loss when the price goes down than the price at which the trader had purchased the CFD units.

 

Concepts of margin and leverage

 

One of the main advantages of CFDs is that they are leveraged products. For opening a position, you don’t need to deposit full value of the trade. You simply have to deposit a small percentage of the trade’s full value. It is also known as “trading on margin”. Though sellers of CFD brokers only say that returns get magnified because of “trading on margin”, it is also true that just like profits losses also get magnified. This means a CFD trader can lose more than the deposited capital. You may learn more on CFD leverage from CMC Markets.

 

Is there any cost involved?

 

There are 4 kinds of costs:

 

#1 Spread – A CFD trader has to pay the difference between buy prices and sell price, which is nothing but the spread. A trader always prefers a narrower spread. Less price movement is required for the trader to make either profit or loss.

 

#2 Cost of holding – Holding cost is charged by the broker if an open position is not closed within a single trading day, before the trading day ends. Depending on direction of position, holding cost can either be positive or negative.

 

#3 Market data fees – These fees are not fixed ones and vary from broker to broker. Check out the market data fees before registering with a CFD trading broker.

 

# 4 Commissions – If you are trading underlying stock based CFDs, brokers charge a commission on the traded units. Check out the different commissions on the position exposure of different brokers. In many cases, a minimum commission charge is there along with a percentage commission (say 0.10 per cent) on full exposure position.

 

Let’s check out some examples to get a real picture of the commissions. Suppose, a person buys 10,000 CFD units of the underlying stock of a certain company. Let every unit of the underlying stock be 100 cents and the percentage commission is 0.10 per cent. For entering trade, the trader has to shell out $12 commission charge ($12,000 x 0.10 per cent).

 

If another trader buys 5,000 CFD units of the same underlying stock at same price, the commission charge turns out to be $5 ($5,000 x 0.10 per cent), which is less than the minimum commission charge of $10. In that case, the trader has to pay the minimum commission charge of $10 for entering the trade.

 

The same commission charge is also applicable on closing trade too, where the commission is applicable on the exit price.

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CFD Trading – Fundamental Concepts Every Starter Must Know

CFD (Contracts for difference) is flexible way of trading, which mirrors price movements of the underlying assets that includes global financial products such as treasuries, currencies, commodities, indices, and stocks. The concept is very simple.

 

A CFD trader neither purchases nor sells underlying asset. The trader simply purchases units of the CFD. You profit when price of the underlying financial product goes up and make loss when the price goes down than the price at which the trader had purchased the CFD units.

 

Concepts of margin and leverage

 

One of the main advantages of CFDs is that they are leveraged products. For opening a position, you don’t need to deposit full value of the trade. You simply have to deposit a small percentage of the trade’s full value. It is also known as “trading on margin”. Though sellers of CFD brokers only say that returns get magnified because of “trading on margin”, it is also true that just like profits losses also get magnified. This means a CFD trader can lose more than the deposited capital. You may learn more on CFD leverage from CMC Markets.

 

Is there any cost involved?

 

There are 4 kinds of costs:

 

#1 Spread – A CFD trader has to pay the difference between buy prices and sell price, which is nothing but the spread. A trader always prefers a narrower spread. Less price movement is required for the trader to make either profit or loss.

 

#2 Cost of holding – Holding cost is charged by the broker if an open position is not closed within a single trading day, before the trading day ends. Depending on direction of position, holding cost can either be positive or negative.

 

#3 Market data fees – These fees are not fixed ones and vary from broker to broker. Check out the market data fees before registering with a CFD trading broker.

 

# 4 Commissions – If you are trading underlying stock based CFDs, brokers charge a commission on the traded units. Check out the different commissions on the position exposure of different brokers. In many cases, a minimum commission charge is there along with a percentage commission (say 0.10 per cent) on full exposure position.

 

Let’s check out some examples to get a real picture of the commissions. Suppose, a person buys 10,000 CFD units of the underlying stock of a certain company. Let every unit of the underlying stock be 100 cents and the percentage commission is 0.10 per cent. For entering trade, the trader has to shell out $12 commission charge ($12,000 x 0.10 per cent).

 

If another trader buys 5,000 CFD units of the same underlying stock at same price, the commission charge turns out to be $5 ($5,000 x 0.10 per cent), which is less than the minimum commission charge of $10. In that case, the trader has to pay the minimum commission charge of $10 for entering the trade.

 

The same commission charge is also applicable on closing trade too, where the commission is applicable on the exit price.

420 Responses to CFD Trading – Fundamental Concepts Every Starter Must Know
  1. Health and Fitness
    April 22, 2018 | 6:41 pm

    As a Newbie, I am permanently browsing online for articles that can be of assistance to me. Thank you

  2. Backyard Design
    April 22, 2018 | 9:37 pm

    Hi, Neat post. There’s a problem with your web site in web explorer, may test this¡K IE still is the market chief and a big component of folks will miss your wonderful writing because of this problem.

  3. Network Communications Manager
    April 22, 2018 | 9:39 pm

    Thank you for the sensible critique. Me and my neighbor were just preparing to do some research on this. We got a grab a book from our local library but I think I learned more clear from this post. I am very glad to see such wonderful info being shared freely out there.

  4. Automobile Production
    April 22, 2018 | 9:40 pm

    hello there and thank you for your information – I’ve certainly picked up something new from right here. I did however expertise a few technical issues using this website, since I experienced to reload the website many times previous to I could get it to load correctly. I had been wondering if your hosting is OK? Not that I’m complaining, but slow loading instances times will very frequently affect your placement in google and could damage your high-quality score if advertising and marketing with Adwords. Anyway I’m adding this RSS to my e-mail and can look out for much more of your respective interesting content. Make sure you update this again soon..

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  8. Very cute kitty
    April 23, 2018 | 2:58 am

    Isn’t that a cute kitty?!

  9. Health and Fitness
    April 23, 2018 | 3:27 am

    Nice read, I just passed this onto a friend who was doing some research on that. And he actually bought me lunch because I found it for him smile Therefore let me rephrase that: Thank you for lunch!

  10. Very cute kitty
    April 23, 2018 | 3:37 am

    Isn’t that a cute kitty?!

  11. Health and Fitness
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    He’s just waiting patiently for the place to open up.

  13. Health and Fitness
    April 23, 2018 | 5:21 am

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