Contract for difference, CFD is a way for trading where in you can speculate the rise and fall of asset’s price without owning the asset. In CFD you will be exchanging the difference in asset’s price from the time the contract is signed. You can keep track of both profit and loss depending on the correctness of your forecast. It is the main advantage in CFD.
Features and Uses of CFD
- Long and short CFD trading
Since you can speculate the movement in price in either direction, you can trade in way that you get profit when market price increases and also you can have a CFD position where in you get a profit when the market price decreases.
- Trading with Leverage
You can get access to large position without committing to entire cost of the asset. It helps in spreading your capital but remember the profit or loss will be calculated based on the full position
- Margin
The funds needed for opening and maintaining a position is only a fraction of the total funds also can be known as trading on margin.
CFD trading – Key concepts
- Spread
Spread is the difference of bid price and offer price. Bid price (Selling price) and Offer price (buying price) are the prices at which short CFD and long CFD respectively can be opened. Many times, the cost of opening of CFD can be recovered by spread.
- Size of the deal
Standard contracts are used while CFD trading. Size of the contract depends on the asset being traded off.
- Profit and loss
Calculation of either profit or loss is based on a formula where in you need to multiply number of contracts and value of each contract; the result is again multiplied by the difference of closing price and opening price.