CFD contracts act as a common financial asset, being a contract for the difference between the current price of a basic trading instrument and its value at the moment of expiry of the «life» of the agreement. The role of the main product can be played by securities of firms, precious metals, energy carriers, currency ratios, indices or goods. This does not transfer ownership rights that are typical of an ordinary purchase/sales transaction. The CFD market involves the «signing» of a contract between the merchant and the owner of the contract, under which the owner promises to provide the difference between the price of the instrument in the current period and what will function at the time of completion of the agreement.
Benefits of CFD Trading
Any assets have fluctuations in their price, they depend on any certain conditions. Traders earn precisely from such fluctuations, whether the price falls or rises.
- The chance of income, whether the base product rate increases or decreases.
- Impressive range of tools for trading.
- The possibility to implement trades on commodity and stock market platforms without having a basic instrument or a large amount of money on the account.
- It is possible to use the maximum leverage.
Process Of Trade In CFD Contracts
There is a fairly simple algorithm for dealing contracts. First, you need to choose the main asset, whose price changes we will determine. After that, we analyze and predict whether the asset will grow in price or fall. Next is quite simple. If we expect an asset to grow, we «Buy» a contract, if we predict a fall, we «Sell». Earnings will be directly proportional to the right price change.
Marginal CFD Contract
Speculators practicing trading with the instrument in question choose to work simultaneously with multiple assets. Thanks to this, it is possible to minimize investment threats in the situation if the value of the goods moves in a direction that is not friendly to the trader. Brokers offer to trade «Contract For Difference» using a leverage. For this, the player must pay a specific %, but the chances for profit are significantly increased.
Let’s look at an example of such a contract. Suppose the trader is going to buy 10 shares worth $1,000. Thus, it needs capital equal to $10,000. Broker requires the provision of margin of 5%. Of the total transaction amount, this will be $500. If the price of the share rises, suppose by $10, the total profit of the trader for 10 shares will be $100. As a result, thanks to the use of leverage, the trader spends only $500 on the purchase of shares instead of the required $10,000.
But it is worth remembering that the incorrectly predicted price fluctuation can lead to large losses, as regardless of the result of the transaction, it is necessary to pay the margin required by the broker.
Classification Of CFD Contracts
Depending on the designated base tool, price divergence agreements are divided into a number of types. The following contracts are adjacent to the most demanded varieties. First of all, these are CFD contracts for securities. In this situation, as the main tools are the shares of companies listed on stock exchanges. Participants generate income on the dynamics of values within a certain type of securities. Since the Contract For Difference trades do not realize the transfer of ownership rights, the buying person is exempt from transferring the transaction money to another state or exchanging it for USD. Yet there is no additional waste, which are characteristic of the exchange trading in shares (stock exchange services, depositary, registrar, etc.).
The price of the contract is the same as the value of the stock on the site. The Stock CFD Buyer shall have all advantages that correspond to this asset variety. On securities purchased under agreements on cost difference is also available dividends. But the latter are usually used to cover the brokerage fee for the use of leverage. No less in demand is inherent in CFD indices, this type of contracts is considered a distinctive financial tool, providing for profit from the divergence in index indicators.
In accordance with the requirements of the above-described agreement, each item of the designated product is equated with a specific price indicator. The characteristic feature of contracts for difference in index prices is an increased degree of profitability, coupled with an equally high risk of bidding. During one session, the index ratio is able to vary by several thousand pips. If the position is successfully closed, the speculator can get impressive income. But in a loss situation, substantial losses won’t keep themselves waiting long.
CFD contracts for goods (agricultural products, energy) are also in maximum demand. Here traders form earnings on transformations of the price of these tools. When there is a lack of confidence in which vector the value moves, traders apply difference contracts to hedge material threats. They open opposite warrants, that is, synchronously «sign» sales and acquisition agreements. It follows that in whatever direction the quote went, the trader will still be able to earn and compensate for the losses.