What is CFD trading?
A contract for difference (CFD) is a popular form of trading
on the financial market.
CFD trading offers traders and investors an opportunity to speculate on the price movement of the assets, without owning the underlying asset itself. In contrast with traditional investments, CFD trading allows traders to take positions on falling prices as well.
Since owning the asset is not a condition with CFDs, an investor can sell the asset and profit when prices fall or lose when prices go up. CFD trading also gives investors access to the global markets - such as shares, cryptos, indices and commodities - in a single trading environment.
Means you only put down a fraction of the value of your trade. In other words, it significantly enhances your buying power by multiple your original investment, allowing you to control a position much larger than the original amount invested.
It is often described as being borrowed funds from the broker, although you are not physically borrowing any money. More information about leverage can be found below.
How does CFD trading work?
With CFD trading, you don’t own the underlying asset. You instead buy a certain number of CFD contracts* (also called units) on a market if you expect its price to rise, and sell them if you expect it to fall. The price of the CFD mirrors that of the underlying asset and follows it at all times.
In the CFD example below using Apple, you’ll see the impact leverage (x5) has in both ways. The exposure that leverage provides in CFD trading affects winning or losing trades. CFDs (contracts for difference) are contracts agreed between the buyers (traders) and the brokers (sellers), based on the speculation of asset prices in specific market conditions.
Profits and losses are calculated by looking at the difference in price between the initial at which the CFD is bought or sold, and when the trade is exited.
To buy 1 Apple unit, you need $56.27
Your position will be five times bigger
- For every point the price of the instrument moves in your favour, you gain 5 times more depending on the number of CFD units you have bought or sold.
- For every point the price of the instrument moves against you, you lose 5 times more depending on the number of CFD units you have bought or sold.
- Essentially, you’re putting down 100% / 5 (1:5 leverage is interpreted as 5x or 5 times) = 20% ($56.27) of the full value of the underlying asset, and Skilling funds the rest, allowing you to open a trade with a value of $281.49 for 20% of that value.
Benefits of CFD trading
Trade on both rising and falling markets
Open either short or long positions according to the market conditions and your trading strategy.
You need significantly less capital to open a trade in comparison to owning the underlying asset. Leverage can significantly increase your gains as well as losses.
Trading with Skilling ensures a regulated environment, segregation of all client deposits, and client-focused customer support.
Ultrafast order execution of 8 milliseconds on average on FX. No dealing desk intervention. Your order gets routed automatically to one or several of our liquidity providers, ensuring your trade is always matched and filled quickly and efficiently.
Wider Offer of Instruments
Contracts for difference allow traders to trade all types of markets at any time (indices, forex, shares, commodities, cryptocurrencies and more). This can be done from a single trading platform (Skilling offers Metatrader 4, Skilling Trader and cTrader) from your phone, web or tablet. Differently to traditional investing, with CFDs you’ll have access to the markets even outside trading hours.
CFD trading can also work as a way to prevent potential losses when owning the real assets. For example, if you own shares of a company but you believe that at some point the share price will go down, you can use CFDs to short them. In case that they actually drop, you will make a profit from the position. But if the price actually increases, then you can just close the trade.
What is margin and leverage?
While leverage multiplies your amount invested, margin is the required amount invested for any given trade.
With an investment of $1,000 and leverage 1:30, you can buy or sell an asset that is worth $1,000 x 30 = $30,000.
The market exposure that CFD contracts provide with leverage is one of the major aspects that makes CFD trading so appealing to investors. You only need to deposit a percentage of the total CFD trade value.
But on the other hand it’s also important to understand the risk a CFD trading account has associated with it.
Not only do investors have much more exposure in winning trades, they have an equivalent exposure in losing ones, and hence why education is essential.
Margin is the reversed logic of the above example. If you want to open a trade that is worth $120,000 and leverage is 1:30, your required margin (amount invested) will be $120,000 / 30 = $4,000.
Leverage and margin requirement varies between 1:2 to 1:30 depending on the asset class traded by retail clients. More information can be found here.
If you have a cash balance of $1,000 in your account and a leverage of 1:30, you can access $30 for every $1 in your available cash balance, or make trades worth up to $30,000 ($1,000 x 30 = $30,000).
This means that, with a smaller deposit, you can still make the same profits (and losses) you would make trading shares or commodities. The difference is that the return on your initial investment can be much higher with leverage, compared to a traditional trading that offers no leverage. The risk is that potential losses are also increased in the same way as the potential profits.
- Skilling offers Negative Balance Protection, ensuring that you cannot lose more than your total deposits.
You have $75 and you expect the price of gold to rise. You can either buy CFD on gold or invest the traditional way. Both examples compared in the table.
If you choose to invest in the traditional way instead, you would need the full $1,500 (no leverage) to buy and own an asset and this way only make money if the gold would increase in value.
|Gold CFD trade
(with 1:20 leverage)
|Cash Needed||75 USD||1,500 USD|
|Buy 1 unit gold at $1,500, closes at $1,550||You make $50, or 66.7% of cash needed||You make $50, or 3.33% of cash needed|
|Buy 1 unit gold at $1,500, closes at $1,475||You lose $25, or 33.3% of cash needed||You lose $25, or 1.67% of cash needed|
What are the costs of CFD trading?
Spread: When trading CFDs you pay the spread, which is the difference between the buy and sell price. If you enter a buy trade you use the buy price quoted and exit this trade, using the sell price, and vice versa.
- The narrower the spread, the less the price needs to move in your favour before you start making a profit; or if the price moves against you, a loss.
- We offer consistently competitive spreads.
Swap fees (also called the interest, rollover or overnight fees): At the end of each trading day (at 21:59 GMT), any positions open in your account may be subject to a charge called a swap fee.
- The swap cost can be positive or negative depending on the direction of your position and the applicable interest rates. For more information regarding the swap calculation formulas please click Commissions and Swap Charges. Please note that the calculation formula may vary according to the instrument type and can be found in each section of the link above.
Note: Premium accounts have lower spreads and are charged commission instead.
Which instruments can I trade with CFDs?
You can trade over 800 instruments, including: