CFD Trading - Contracts For Difference
A CFD or Contract For Difference is an agreement between two parties to the trade (Buyer and Seller) to exchange the difference in value between the opening and closing price for a particular asset.
Trade opening price would be the price in effect at the moment the agreement is made at while the closing price would be the price at which the agreement is executed.
Essentially trading CFDs boils down to a contract between yourself as a Client and the market. You open a trade by purchasing a contract for a particular asset and close the trade by selling the contract back to the market, hopefully making a profit in the process.
CFDs don’t necessarily have to be on the Buy side. As with all trades, you can open a CFD trade on the sell side.
The principle remains the same. Buying the contract back from the market to close the trade would hopefully result in profit.
CFD contract sizes are fixed. CFDs on shares, for example, are made on the value of 100 shares of the company in question. For example, a contract for Google shares (GOOGL) would be for the value of 100 shares in the search engine giant. At today’s price of USD 853.69, that would make a full contract worth $85,369.
As with forex trading, CFDs are leveraged products. Trading with a 1:30 broker would effectively allow you to control $30 worth of trades for every $1 deposited in your account.
At this leverage, you would need $2,845.56 in your account to trade a full contract of Google shares.
Sticking with the Google example, if you believe the share price will increase, you will Buy a contact which would then be Sold back at the higher price. This is where the “for difference” comes it.
There is no physical delivery of Google shares involved. The contract is purely for the difference between the opening and closing prices.
Buy a contract for Google at USD 853.69. Let’s assume the share price rises to USD 875.69. Closing the trade makes a profit of $22 per share (875.69-853.69) for a total on the contract of $2,200 (22 x 100).
Conversely, if we think Google shares will fall in value, we would sell a contract at the USD 853.69 level.
Assuming the price falls to USD 831.69, the closing the trade again makes a profit of $22 per share for a total on the contract of $2,200.