What are CFDs?
Contracts for Difference (CFDs), are a new and easy way to trade on financial instruments such as shares, indices, currencies and commodities. Unlike buying shares through a stock exchange, when trading CFDs you do not physically own the underlying instrument you are buying or selling and therefore do not have to pay the associated costs of using a stockbroker such as account management fees, high commissions and platform charges.
CFDs allow you to trade on whether the price of a financial instrument is likely to go up in value (strengthen) or go down (weaken). As with all types of trading your profit or loss is determined by the difference you buy at and the price you sell at. This gives you the opportunity to potentially profit from a market whether it is rising or falling.
For example, imagine a major oil company has just forecast a record profit and you think the price will go up. You decide to buy 1000 CFDs at $19.50. If the price moved up, say from $19.50 to $19.90, you would have made a profit of 40 cents per CFD owned. With 1000 CFDs, that would equate to $400.
However, if the price dropped by 40 cents, you would lose $400 instead. For a more detailed example of a CFD trade visit our CFD trading example.
Buying a rising market
If you buy a financial instrument that you believe will rise in value, and in due course your prediction is correct, you can sell the instrument for a profit. However if you are incorrect and the value falls, you will make a loss.
Selling a falling financial market
If you sell a financial instrument that you believe will fall in value, and in due course your prediction is correct, you can buy the instrument back at a lower price, for a profit. If you are incorrect and the value rises, you make a loss.
Margin trading
CFDs are a leveraged product which means that you are only required to deposit a fraction of the overall value of the trade. Typically, margins with CMC Markets vary between 3% and 20%. Margin enables you to magnify your return on investment. However, losses will also be magnified so it is advisable to use one of the free risk management tools such as a stop loss or limit order that CMC Markets provides to help take control of your risk.
The spread
As with prices of all financial instruments, CFD prices are quoted with a bid price and an offer price. The bid or ‘sell’ price is quoted first and the offer or ‘buy’ price is quoted second. The spread is the difference between the bid and the offer. If you think the price is going to go down and you want to sell your position, you use the sell price. If you think it will go up, you use the offer price.
For example, If you were viewing the U.S Crude Oil price, it might look like the example
to the right.
Buy at 77.60 if you think the price of U.S Crude Oil
will rise in value. Sell at 77.54
if you think U.S Crude Oil will fall in value.
For more information on CFD trading, register for a free webinar or live trading workshop. Plus when you open an account you’ll receive Trading IQ – CMC Markets guide to CFDs. Find out the advantages of CFD trading.
