What are CFDs

A Contract for Difference (CFDs) is a popular financial trading instrument and stand for contract for difference, the contract is an agreement to exchange the difference in value, in between opening price and closing price, the difference will be exchange between both parties, buyer and seller/cfds provider and trader. The price or difference in value is determine by an underlying instrument such as share or index price.

CFDs can be used to access and trade currency, commodities, bonds, indexes and shares around the world. CFDs can be traded in both direction, long and short, mostly, for any period of time, except for commodities and bonds; it will also depend on your CFDs account provider.

Contract for Difference s are a high leverage product,  increasing like this the risk of losing more than your initial investment. Traders don’t own the underlying asset, because it is a derived instrument and it doesn’t need a physical buyer or seller to be able to open or close your position.

Retail investors who are contemplating the risks of trading in contracts for difference (CFDs) have a new resource that aims to provide clear, independent advice on CFDs and the risks they entail. The guide entitled “Thinking of trading contracts for difference?” Download PDF – has been published and is available on the Australian Securities and Investments Commission’s (ASIC) website.

This document explains CFDs in depth and is a must read before trading CFDs.

Sample for opening a long position

Day 1 (OPEN POSITION) Transaction
Open long Position XYZ 1000 cfds
At price $70
Contract Value $70000
Brokerage fee or % $5
Initial Margin 5% or less (Cash Outley) $3500
Over night funding fee $1.79
Closing Price $70.50
Contract Value $70500
Day 2 (CLOSE POSITION) Transaction
Close Long position XYZ 1000 cfds
At price $71
Contract Value $71000
Brokerage fee or % $5
Over night funding fee $0
Profit/loss $1000
Profit/loss Minus fees $988.21
Return on Investment 25%

Sample for opening a short position

Day 1 (OPEN POSITION) Transaction
Open long Position XYZ 1000 cfds
At price $70
Contract Value $70000
Brokerage fee or % $5
Initial Margin 5% or less (Cash Outley) $3500
Over night funding fee $1.79
Closing Price $69.50
Contract Value $69,500
Day 2 (CLOSE POSITION) Transaction
Close Long position XYZ 1000 cfds
At price $69
Contract Value $69,000
Brokerage fee or % $5
Over night funding fee $0
Profit/loss $1000
Profit/loss Minus fees $988.21
Return on Investment 25%

Things to Remember

what is contract for difference trading

Introduction to CFDs Video

Covers the CFDs market overview and different methods to trade CFDs. The video is posted by Matt Simpson from ThinkForex.

Related Documents

http://en.wikipedia.org/wiki/Contract_for_difference
http://en.wikipedia.org/wiki/Leverage_(finance)
https://www.moneysmart.gov.au/media/173820/thinking-of-trading-in-contracts-for-difference-cfds.pdf

Risk warning: Your capital may be at risk. CFD trading is suitable for experienced traders and not beginners.