A CFD is a derivative financial instrument that repeats the movement of its underlying (underlying) asset. Share CFDs, for example, allow you to make a profit or loss in the event of a change in the price of shares, but the shares themselves are not acquired. In essence, these are contracts between the client and the broker, and they have significant advantages that have brought them popularity over the past years. We will talk about them in this article.
How does it work?
If the ask price is 15.50, and 100 shares are bought for it, then the cost of this transaction is $ 1,550. If you work through an ordinary broker, then with a credit lever of 2: 1 (50%), you will need to have at least $ 775. Working through a CFD broker, where the leverage is often 20: 1 (5%), you will need to deposit only $ 77.5.
Opening a position, you immediately get a loss equal to the size of the spread. Therefore, if the size of the spread is 6 cents, then the price will need to be advanced by 6 cents at least in order for you to go to breakeven. In addition, it is possible that you will have to pay a commission and interest on the credit lever (when moving positions to the next day). This is the disadvantage of CFD trading.
If the underlying asset rises in price and the bid price reaches 16.00, the acquired CFD contract can be sold at a profit of $ 50, which will be $ 50 / 1,500 = 3.2% return on capital.
The advantages of CFD trading
• Great leverage. CFD-trading provides a much larger leverage than traditional trading. For some CFDs, standard leverage is 50: 1 (2%). Sometimes the margin requirements will be 20% (i.e. 5: 1) and even more. The greater the leverage, the lower the margin requirements, that is, the investor / trader spends his own capital much less, and has a larger potential for profit. However, as for the loss.
• Access to global markets from a single trading platform. Traders can easily trade in any market in the world through their CFD broker.
• No restrictions on short positions and stock lending. In some markets there are rules prohibiting the opening of short positions in certain conditions. The CFD market as a whole has no such restrictions. You can sell shares without coverage at any time, and since no title to the underlying asset is transferred, there is no need to hold these shares.
• CFD brokers use the same types of orders as traditional brokers: stop orders, limit orders, as well as conditional orders like “One cancels the other” (OCO), etc. Some brokers even offer guaranteed stop orders for a fee.
• CFD brokers often do not charge commissions or fees to enter or exit a position. Instead, they take money from the spread – by buying, the trader must pay the ask price, and by selling – the bid. Depending on the volatility of the underlying asset, the spread may narrow and expand, although, as a rule, it is fixed.
• In some markets, you need to have a minimum amount of capital for intraday trading, and there are also restrictions on the number of transactions made during the day. There are no such restrictions for CFD trading. The minimum deposits are $ 1,000, $ 2,000, or $ 5,000. However, some brokers do not limit the level of the minimum deposit.
• Large selection of trading instruments. CFD on stocks, indices, bonds, currencies (CFD Forex), commodity and commodity futures.
CFD flaws and how to fix them
Although CFD trading looks good, it has its drawbacks
1. First, the need to pay a fairly high spread makes it impossible to make a profit on small movements. Spread also slightly reduces the profit from the transaction and increases the loss.
FxCash offers to solve this problem. The solution is simple – return the spread.
Return up to 80-90% of the spread by trading with CFD brokers.
2. It should also be noted that the CFD trading industry is not very carefully regulated. This means that the reliability of a broker depends on his reputation and financial strength. And although there are many wonderful CFD brokers in the world, the choice should be treated with great care and thoroughness.
FxCash offers only regulated and licensed brokerage companies to operate.
Here is a list of regulated CFD brokers with a spread return in FxCash.Ru (recommended):
FxPro — CFD on futures, stocks, indices, commodities, energy. Regulated by CySEC (078/07), FCA (509956).
Return the spread FxCash to CFD to 8 USD per lot.
ACFX— CFD on futures, stocks, indices, commodities, energy. Regulated by CySEC (085/07), FCA (480859).
Return the spread FxCash to CFD to 8 USD per lot.
Charges (spread return) are made once a day!
FIBO – CFD on futures, indices, commodities, energy. Regulated by FSC (SIBA / L / 14/1063), CySEC (118/10), ASIC (439907). Return FxCash spread by CFD2.4 USD per lot.
Charges (spread return) are made instantly!
HYMARKETS —CFD on futures, stocks, indices, commodities, energy. Regulated by FCA (186171), MiFID. Return FxCash spread by CFD to 8 USD per lot.
Now you have an idea of what are CFD contracts. CFD trading has many advantages, including small margin requirements, easy access to world markets, no restrictions on opening short positions, and the almost complete lack of fees. However, a large leverage increases both profits and losses, and a large spread can greatly cut your profits. CFD is a great alternative for some medium- and long-term traders / investors, but everyone should weigh the pros and cons before starting to work on CFDs.