WHAT IS A CFD?

WHAT IS A CFD?

CFD means “Contract for Difference”. Originally used by large institutions in UK to cost effectively cover their equity exposures, CFDs are now a mutual and communal trading tool used by the retail investors around the world.As the name suggests, a CFD is simply the setting of a contract for the difference between the purchase price and sale price of a financial instrument.A CFD reflects the performance of an instrument such as Commodities and Indices etc, offering the benefit of trading these without having to physically own the underlying instrument itself.CFDs offer active traders a number of benefits over and above that of other trading instruments. This website seeks to explain these benefits.

A Flexible Tool :

One of the major benefits of using CFDs is that you can place both long and short positions with equal ease. If you buy (go long) a CFD, you can potentially profit if there is a rise in the underlying reference asset price and lose if underlying reference asset price falls. Conversely, if you initially sell (go short) a CFD, you will profit from a fall in the underlying reference asset price, and lose if the underlying reference asset price rises.

A Clear Advantage :

The transparent pricing structure of CFDs means that unlike other derivatives the price is always based on the underlying instrument. Our principal’s CFD prices are derived from the underlying market. This means CFDs give you access to the underlying market liquidity, plus additional liquidity offered by our principal.

An efficient use of your capital :

CFDs are traded on margin. This is a far more cost efficient use of capital because you only have to allocate a small portion of the value of your position to secure a trade, whilst still maintaining the same market exposure as you would have if you had paid the full consideration. This mean your potential return on investment is magnified but remember trading on a margin will also magnify losses, if your position goes against you.

Margin :

You do not pay a full underlying value of a CFD trade. However before your trade you are required to deposit known as “initial margin”. Initial margin rates vary between instruments. These are calculated as a percentage of the overall value of the trade, typically between 1% to 5%. If all your trade is eligible for a 5 % margin, you can hold positions worth a total USD 100,000 having deposited only USD 5,000. You would therefore gain twenty times leverage on the collateral provided.Caution: It is important to remember that margin trading increases your exposure to risk and reward, therefore, losses and profits can be significantly higher.

03 ways to Trade

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Quoted and Basic Currencies

he spot exchange rate is the price of one currency in terms of another. In the example above,120.44 – 120.52 USD/JPY, USD is the basic currency and JPY is the quoted currency. This is not the case in our second example, 1.3600 – 1.3610 GBP/USD, where USD is the quoted currency because it is second in the GBP/USD expression.

Pips and Figures

The following example demonstrates what pips and figures are:

Direct and Indirect Quotes

On the currency exchange market in every country, the local currency is quoted directly or indirectly against the US Dollar and other foreign currencies.

• The direct quoting is the amount of local currency needed to buy one unit of the foreign currency and the amount of local currency respectively due to be received when one unit of foreign currency is being sold. For instance, in Japan:
  
  120.44 – 120.52 USD/JPY
  
  This means that dealers are buying one dollar for 120.44 yen, but are selling it for 120.52 yen.

Spot Date

The spot date on currency exchange markets is two working days after the actual deal. It takes two days to process all necessary documents and carry out all transactions, keeping in mind that usually the countries whose currencies take part in the deal belong to different time zones and payments need to be synchronized. The spot date cannot be Saturday, Sunday or an official holiday for any of the two countries. In such cases, the spot date is the next working day.
There is an option for the deal to be negotiated with a value date prior to the spot date, for example the same day as the date of the deal or the next day. In the first case, the value date is today’s date and in the second it is tomorrow’s date. In these two cases, the exchange rate is different from the exchange rate on the spot date. The difference arises because of the interest rate differential.

Spot Rate

Spot rate is today’s market price of one currency measured in terms of another, for example, the price of one US dollar in Swiss Francs. The spot rates of all currencies against the US dollar (USD) are basic ones, the rest are considered cross rates.
Some of the existing currencies are considered major; these include the US Dollar (USD), the Euro (EUR), the British Pound (GBP), the Swiss Franc (CHF) and the Japanese Yen (JPY).
When you ask dealers for a quote, for example EUR/USD, they will provide you with two different prices, e.g. 1.0643 – 1.0647. From the dealer’s perspective, the difference between the two numbers “buy” and “sell” is called spread. If you want to buy 1 Euro, you have to pay theoretically 1.0647 USD for it, but if you want to sell 1 Euro you are going to be paid 1.0643 by your dealer. In this case, the difference between “buy” and “sell” in the spread is 0.0004, or 4 pips. In fact, buying one currency is the action of selling another. Alternatively, selling one currency actually means that you are buying the other.

Currency

Please, enter the currency pair abbreviation separating the two currencies by a slash, e.g. EUR/USD.

Symbol: