The Contract for Difference commonly abbreviated as CFD speculates or marks the rising or falling prices of fast- pacing global financial markets such as in shares, commodities, indices, etc. It can be performed on a vast range or scale depending upon the type of financial market the trader is interested to invest in. It is a financial arrangement in which the buyer and the seller in a transaction which is based on the price movement of the share and not on the stock. When you trade a CFD you change the price difference of an asset from the point at which the contract is starting and ending. In CFD trading one can invest in price movements in any direction.
Some of the main features of CFD are Leverage, Hedging, Margin, and Short and Long Trading. With the organization of the features, there are some key concepts used in CFD which would help us to understand how does CFD trading works. The key concepts are Spreads, Deal Sizes, Durations, and Profit or Loss.
The CFD prices are quoted in two which is the Selling price and the Buying price. The selling price will always be slightly lower than the original market price, whereas the buying price will always be slightly higher than the original market price. The difference between both the prices is known as Spread. Most of the time, the buying and the selling price will be adjusted according to the cost of making the trade. The exception is that our CFDs are not charged via the spreads, Instead, the buying and the selling prices match the price of the underlying market and the charge for opening the CFD position is thus based on commission. Thus, by using this commission the investing in share prices with CFD brings close to buy and sell shares in the market.
- Deal Sizes
CFDs are not traded in singular form but they are traded in bulk or lots. The size often changes and the size of an individual contract depends upon the underlying asset which is traded upon reflecting how the asset is traded in the market.
Most of the CFD trades do not have a fixed expiry. Instead, a position is closed for trading in the opposite direction of which it is opened. Example: A position of 500 gold contracts would be closed by selling those 500 gold. If you keep the daily CFD position off time then you will be charged for overnight. This cost thus shows the cost of the capital provided in order to start a leveraged trade. This does not happen in the case of a forward contract, in which there is an expiry date in the future that covers all the overnight charges.
- Profit and Loss
In the end, to calculate the profit and loss earned from the CFD trade you need to: Multiply the total number of contracts by the value of each contract, You then need to multiply that particular figure by the difference occurred in between when you opened the contract and when you closed it. If you paid any other charges you will subtract it by that particular amount and thus you will get the status of your trade. Any other paid charges can be Commission, Guarantee Charge Fees, Overnight Funding Charges, etc.
The best CFD brokers are city index, eToro, IG, XM, and ATFX. They all are global CFD and forex broker except eToro, it is a global social trading broker.
It’s good not to hold CFD more than 4-6 weeks because after that they levy a charge and started getting expensive. Therefore, if you wish to invest in shares for a shorter period of time then go ahead with CFD but for a longer period, you must consider other options.