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understanding CFDs

An introduction to CFD :

A contract for differences (CFD) is between an investor and a service provider. The profit and loss are determined by the difference in an underlying asset’s open and closed prices. CFDs’ underlying assets can be a stock, cryptocurrency, Forex, market index, futures contract, or any other financial commodity. Cash is used to settle CFDs. There is no physical delivery of products, nor is there any security.

Because CFDs only pay the difference in price between open and closed trades, UKs CFDs providers allow investors to trade on securities on rising or falling prices, for short-term speculation, which is notably popular in the Forex, Crypto, and commodities markets.

How do you trade CFDs?

CFDs enable investors to speculate on the fluctuation of stock prices. In other words, CFD traders can speculate on whether the price will rise or fall. Traders who expect a price increase will open a CFD buy contract, while those who expect a price decrease will open a sell contract.

The net difference between the purchase and sale prices is added together. The investor’s brokerage account settles the net difference, representing the trades’ gain or loss. In contrast, if a trader feels the price of an asset will fall, he can open a sell position, and the broker will execute. Again, the net difference between the gain and loss is settled in cash via their account.

Mathematically presnted, the profit-and-loss of a CFD trade is calculated as:

PnL = IBuySell*Quantity*(PriceClose – PriceOpen )

SettlementNet settled at contract unwind.
Contract PriceFixed at contract open
ExpirationNo expiry
Early unwindYes
Standardized ContractYes

Benefits of CFDs

  • There are no short selling restrictions. It is feasible for investors to enter into either a long or short position.
  • A CFD brokerage account usually cover a wide range of underlying financial markets and thousands of available assets. It allow investors to trade the price movement of multi-asset class such as ETFs, FX, stock indices, cryptocyrrencies, and commodity futures.
  • trading can receive the potential return without actually owning the underlying asset.
  • It can be traded with margin which can magnify the potential profits/loss.
  • As an OTC product, there are fewer regulation compared to standard exchanges. Thus, it has a lower deposit requirement for opening a CFD trading account.

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