How to trade CFDs

CFD trading is a way to trade financial markets allowing you financial leverage, to go long and short and access a wide range of financial markets.

A CFD is a financial derivative whose price is determined by the price of the underlying asset. When you buy a CFD, you have an asset whose value is determined by the price of the underlying asset it follows.

The main advantages of a CFD when compared to the underlying asset are the following:

1. Broker platforms offer leverage up to 10x for CFD positions in financial assets like stocks and 100x for currencies. Hence, CFD trading requires less capital upfront than trading the underlying asset since it is a leveraged product.
2. CFD allow you to go long and short a specific asset
3. CFDs allow you access to a wide range of markets
4. CFD allow you around-the-clock trading
5. CFD allow immediate cash settlement

CFDs are available for more than 16,000 markets including forex, stock indices, stocks, cryptocurrencies, ETFs, commodities like metals and energies, options, interest rates, bonds, sectors, and stock index futures.

CFDs are used for intra-day, daily or medium-term trading. Trading the underlying financial assets is for long-term trading. When trading CFDs for stocks, you don’t receive any dividends. Dividend adjustments are integrated on the equity and stock index CFDs. CFDs can be used for hedging. Lastly CFDs do not have a settlement period.

CFD trading Definitions

Initial margin: when you trade CFDs you are only required to put a percentage of the trading position you want to take. This is known as margin. Initial margin is the amount you initially deposit in your trading account.

Variable margin: Variable margin is what is used as collateral on your open positions when using leverage. Broker platforms offer leverage up to 100x for trading currencies. this means that you deposit $1,000 and you can trade a position of $100,000. If you profit 1%, of $100,000 you make a $1,000 profit (your $1,000 became $2,000). If you lose 1% of $100,000 you lose your initial margin of $1,000 and hence you are wiped out.

Margin requirement: Margin requirement is percent requirement for trading a position. If there is a margin requirement of 1%, it means that to trade a $100,000 position you only to deposit $1,000.

CFD Trading example

You open an account with $1,000 and utilize 100x margin to trade a currency position of $100,000. You have only deposited 1% of the trading account. If you lose 1%, you lose your whole initial margin and you get wiped out.

If instead you open a trading account with $20,000 and you take a $100,000 position, your variable margin of 1% is $1,000 and is only 5% of your “initial margin” of $20,000. Hence, your utilized margin is 5%.

If you lose 1% of the $100,000 position, that is $1,000 and you only lost 5% of initial margin.