CFDs (Contract For Difference), also known as Contracts for Difference, are instruments that allow people to trade assets without owning them. But what are CFDs in trading and how do they work? Do they offer traders better options than conventional instruments? Well, in some cases yes, and in some cases no.
CFDs can be traded on any financial instrument, including stocks, currencies, commodities and indices. CFDs simply give a trader the opportunity to speculate on changes in the price of an asset without purchasing it.
The trader simply predicts whether the price will increase or decrease. If the market changes exactly as the trader predicted, then he takes profit. However, if things go the other way, the trader may face much greater losses than with conventional instruments.
The real value of CFDs lies in the variety they have for the trader. Without them, most would have to find brokers for all the assets they wanted to trade. However, with CFDs, one platform is usually enough to trade almost anything imaginable. This is one of the main reasons why traders choose CFDs in the first place, but there are many others.
Where to look for CFD?
Traditionally, in the Forex market, the trader’s attention is drawn to currency pairs. However, when adding another pair, in the MetaTrader4 market overview window, a section of symbols with contracts for difference CFDs catches your eye.
The option opens up access to a long list of assets encrypted under strange icons, like a Twitter hashtag. These are tickers - symbols of instruments on world exchange platforms.
How to get started with CFD contracts
You will need a broker with CFD instruments and its MetaTrader 4 platform. As for companies, I will recommend you AMarkets and Exness .
Look at the article about the broker Amarkets.
Go to the broker's website, read information on CFD contracts, download the platform and ask the operator how to open a demo account on Forex.
Open abrokerage account amarkets
You can carry out similar actions with the second company. An article about the Forex broker Exness will help you with this.
Open an account with Exness
Metatrader
When the company is selected, install MetaTrader 4 on your PC and follow the following instructions:
- select the “ View ” section - “ Market Overview ” tab;
- move the mouse cursor over the inscription “ Symbol ”;
- right-click and select the “ Symbols CFD category ;
- click the " Show " button;
- Click the " Close " button.
After this, you can select the desired instrument and proceed to trading. From now on, you can work with CFD contracts as with currency pairs. Below is a video that walks you through all the steps listed above.
Graph Analysis
To successfully analyze a chart with CFD tools , read about Japanese candlesticks for beginners. I also recommend watching the master class , which is entirely dedicated to our topic.
What is CFD?
Three hundred years ago, an auction procedure was introduced to determine the price of agricultural goods through the conclusion of transactions with equal supply and demand, carried out on a special platform - the stock exchange. Now this rule has been extended to all goods and raw materials, enterprise securities - shares and debt obligations (bonds).
The Forex market stands apart, which, being decentralized in its essence, excludes the manipulation of national currencies of states. Currencies are traded on the international interbank market without reference to a site and are not subject to regulation when the rate is determined by global supply and demand.
Speculators of the 20th century introduced a new class of instruments - derivatives of exchange-traded assets. Futures and options on stocks, financial instruments and commodities made it possible to reduce the costs of commission payments to exchanges, avoid taxes and take advantage of leverage.
Leverage, or leverage, allows you to trade a package of an asset (100 shares or 1000 bonds, etc.) for 10% of the cost. In this case, profit or loss is accrued at 100%.
A CFD (Contract For Difference) is a derivative contract, a percentage of the value is taken from a block of shares (or any other asset, called the “underlying”) equal to 1 lot. Unlike futures, a lot can be split like a currency lot to a minimum value of 0.01 lot.
Such pricing is the explanation for the origin of the contract. Securities of US or European companies are traded at prices ranging from tens to hundreds of US dollars. Futures and options prices reach the cost of a used car. A small investor has only one option - buying one share at a price of 5% of its value.
CFD contracts are an over-the-counter offer between a broker and a trader in which the purchase or sale price of an asset (from the broker’s list) is set to zero. The trader who has entered into a contract makes a deposit (2 or 5% of the market value of the asset), realizing that when the position is closed, he will either make a profit if the trading result is positive, or a loss will be written off from the account.
How to trade CFDs profitably
A good system is a set of rules for trading. Some rules are rigidly defined, while others allow for a certain amount of subjectivity. However, any system must address four things:
- Carry out transactions with a good profit-to-loss ratio.
- Have clear signals for trade entry points and direction.
- Determine exit conditions for both winning trades and cutting losses.
- Ensure position sizing is determined so that if losses occur they are not catastrophic.
Calculation of profit in CFD trading
Let's say you bought a CFD at a price of $5.
With a trade volume of $10,000, the number of CFDs purchased would be 2,000 (10,000 / 5.00 = 2,000).
Next, the value of your contract rises to $5.50, after which you decide to close the position.
The difference in asset value is: 5.50 – 5.00 = $0.50. 2000 x 0.5 = $1000. This is profit.
Types of CFD instruments
Over-the-counter assets, which include CFDs, are written on any type of underlying asset, if the pricing and settlement conditions are clear to both parties (seller and buyer).
As a rule, CFDs on shares of famous brands are in demand. Quotations and codes of instruments (tickers) are the same in the trading terminals of Forex brokers and the exchanges on which these securities placed during the IPO are traded.
Each exchange has its own index, which includes securities of the “flagships” of the country’s economy (“blue chips”), calculated according to the platform’s methodology. Buying or selling an index is possible through CFD contracts. The index value is relative, measured in the process of constant recalculation of stock prices. Therefore, the underlying asset that determines the cost and calculation of the difference for CFDs is an index future.
Energy futures, as well as bonds and currencies, can be purchased as a CFD contract. The width of the offer of the type of basic instruments that define contracts for difference is limited by the offers of world exchanges and the imagination of the broker.
Summary
Friends, you have become acquainted with a new financial instrument that is perfect for beginners and advanced traders. To verify this, go to the website of any brokerage company, open a demo account and try to work with your trading methodology on CFD instruments. Don’t forget to share your results in the comments below the article.
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Dividends on shares
If shares were previously purchased on the stock market with the expectation of future growth, dividend payments were not taken into account. The successes and business achievements of individual companies made it possible to provide payments to shareholders in the form of dividends that exceeded the yield on bank deposits, which caused a speculative increase in blue chips bought in the “hunt for dividends”.
Based on the results of each quarter (the frequency is determined by the meeting of shareholders), summing up the results of financial activities, the joint-stock company makes a decision on the payment of dividends.
The percentage of net profit determined for payment is divided in total by the number of shares, after which a decision is made on the timing of payment.
Before the start of the shareholders meeting, a “cut-off” is made, the timing of which is known in advance. A special registrar company takes into account the owners of securities at the cut-off time in order to transfer the amount of dividends to their account in case of a positive decision.
Any purchaser of shares before the cutoff has the right to count on the amount of quarterly (annual) dividend payments.
CFDs, like any derivative contracts on shares (futures and options), are not entitled to payment by law. The broker himself decides what to do in this case, so carefully read the terms of payments and accrual of dividends on the website and the texts of the Agreement.
The general practice of such payments on the part of the Forex dealer is as follows: if at the time of the cutoff the client was selling CFDs on shares, the amount of dividends will be deducted from the account, and credited if CFDs on shares are purchased.
The amount is multiplied by the number of shares in the CFD specification. 1 full lot equals 100 shares. The dividend is calculated per share.
After the cutoff, a shareholder vote and financial payments will take place some time later. In the trading terminal, on the broker's website and in the media, the dates of cut-offs, meetings, dividend amounts, results known in advance are published after the fact.
The size of dividends - expectation and reality have a strong influence on the price of securities, causing growth or decline (“dividend gap”). Investors and speculators carefully monitor information and corporate news in search of short-term guaranteed income.
Stocks tend to rise before the cut-off and fall when dividends are paid. Rumors about high payments cause trends, but a novice investor should take into account the “external background” - the general economic recovery, which can ignore negative news.
How much money do you need to trade CFDs?
This depends on the minimum deposit your broker requires. You can easily start even with $100. At the same time, you will have the opportunity to trade shares of most international companies. The main thing is to consider the margin (which is usually from 5 to 10%) and do not open too many transactions at the same time.
CFDs are perfect for beginner traders who want to try their hand at trading and trade on a large number of financial markets without investing large sums of money.
Pros and cons of CFD
- Ideal for the small investor.
The cost of “entry” to world exchanges is from 5,000 US dollars. The minimum purchase is 10 shares, the maximum leverage is 1 to 3, the average change in stock price is about 30% per year. The Forex broker gives the investor access to the stock market with a deposit of $100 and leverage up to 1 to 500.
- Low transaction costs.
When trading shares, a stock broker charges funds for maintaining an account, for a depository (storage and accounting of shares assigned to the trader), a percentage for maintaining a trader’s account, and a commission for each transaction. If the trader decides to sell the shares, the broker will issue an invoice for using the loan.
- Single account and terminal.
Shares are traded on various platforms. A stockbroker divides accounts by exchange and instrument. The difficulty of access to the sites due to the requirements of the Regulators does not allow us to provide the client with all the exchanges of interest. As a result, the trader has to divide the funds, transferring them to different accounts for the purchase of currency, shares or options, or open accounts with different brokers.
Trading platforms for different brokers may vary; there is no uniform coverage, like Metatrader, in the stock markets.
Disadvantages of CFD
- There are both risks of problems with the permitting documentation (licenses) of the Forex broker, and the likelihood of a “scam”;
- An investor who does not correctly account for the leverage effect is exposed to the risk of losing the entire amount of the deposit;
- CFD does not give ownership, so the mechanism and fact of dividend payment depends on the broker’s decision;
The Secret CFD Trading Opportunities Everyone Knows About But Doesn't Pay Attention
If you are tired of losing money on currency pairs, you should try using the stock market for shares with predictable dividend yield. Open the S&P chart and evaluate the trend, which is mostly going in one direction:
The growth of shares is predetermined by the market mechanism. Taking the direction of the trend as a constant, the investor can only choose the right portfolio of shares and diversify investments (“put his eggs in different baskets”).
All Forex brokers provide access to CFD contracts. Therefore, choosing a company comes down to studying forum and website ratings, licenses and reviews, which will ensure portfolio protection.
You should pay attention to
Roboforex Stocks , the broker is in the top 10 of any Forex ratings. The difference is that this division of Roboforex specifically deals with stocks. If a trader decides to become an investor and receive income from the market, learn how to select securities and how to work correctly in the stock market using CFDs, it is convenient to do this in this company.
Tips for choosing a CFD broker
In a highly competitive market, CFD brokers are constantly updating their services and trading platforms.
Here are the main points to consider:
- Broker's commission amount. It can be a fixed amount or a percentage of transactions.
- Trading platform. Make sure it is reliable, has good software and news.
- Check your broker for the number of CFD instruments that are available for trading.
- Make sure your broker is regulated by the FCA or BaFIN. All other offshore regulations are purchased for a couple of thousand dollars and do not provide any guarantee that the company is not fraudulent.
Rating of the best
The main requirement for any broker is the security of transactions.
I will list the leaders in this field with an impeccable reputation. Their activities are controlled by various international organizations, including the highest level regulator - the UK Financial Conduct Authority (FCA):
- XTB. It is primarily a Forex and CFD broker. Global player with offices around the world.
- eToro. Well known Israeli startup. Founded in 2007, it operates in the Russian Federation in partnership with Sberbank.
- IG. Registered in the UK in 1974. One of the largest CFD providers in the world.
- Plus500. Israeli CFD broker operating on the London Stock Exchange.
- Markets.com. Global CFD and FX broker founded in 2010. Markets.com is controlled by two regulators - Cysec in Cyprus and FSCA in South Africa.
What strategies should you use for your CFD investment portfolio?
Working with CFDs on shares occurs mainly “from purchases”; growing trends are determined using moving averages with a period setting of 50, 100 or 200.
Oscillators (mainly MACD) are used as a filter to avoid overbought trades by adding a position when the market is oversold.
The reliability of a CFD purchase is determined by Alexander Elder’s “Three Screens” tactics. Trading from Murray or DeMark levels is widely used.
