Trading Contracts for Difference (CFDs)
Contracts for Difference (CFDs)
A Contract for Difference (CFD) is a product that allows you to profit from the price movements of its underlying assets, such as shares, stock indices, futures, etc. without actually buying or selling them. This means that if you have bought a contract for difference (CFD) on ABC company shares, you do not actually acquire the corresponding number of shares, but have the opportunity to profit from the difference between the buy and the sell prices. A CFD deal is settled on the day it is concluded.
For instance, if the price per Intel share is 30 USD and you believe that the shares are undervalued, you could buy “contracts for difference” on 150 Intel shares. In case the price rises by 1 USD to 31 USD, you will realise a profit of 150 USD. If the price drops to 29.50 USD, you will realise a loss of 75 USD.
Trading stock indices is buying or selling CFDs on these instruments so as to realise profit from changes in their levels. A stock index is composed of individual stocks and its level is determined as the weighted average of the prices of these stocks. The US30 index is composed of the stocks of the 30 leading industrial companies in the US, and the USTECH100 index is composed of the stocks of the 100 most popular American technological companies.
For example, if the US30 is currently at 18,000 USD and you want to buy it, you should have at least 180 USD in your account (the margin amount is 1% of the index’s value). In case the index increases to 18,200, you will realise a profit of 200 USD. And vice versa, if the index decreases to 17,800, you will endure a loss of 200 USD.
Although a contract for difference (CFD) is a financial instrument rather than an asset, it gives its holder certain rights, which holders of the base asset also have. These are the right to a dividend, splitting, or merging shareholder capital. CFDs do not give the right of ownership over the assets of a company or voting rights, and they are not transferable and are not traded on regulated markets. Market makers who offer these instruments have the right to close their clients’ positions if they deem it necessary, regardless of whether the company has been declared bankrupt or not. CFD deals are settled on the day they are concluded.
Short sales give you the opportunity to profit even when the markets are going down. If you believe that CFD share or index prices will go down, you could sell the share (index) CFD now, with the intention to realise a profit by buying it at a lower price later. Short sales are closed by buying the same quantity of shares or indices.
For instance, if the price per Intel share is 30 USD and you believe that the shares are overvalued, you can short sell 100 Intel shares at that price. Later, when the share price drops to 27 USD, you can buy the same number of shares, thus closing your short position and realising a profit of 300 USD (3 USD per share). If the price increases to 33 USD, you will lose 300 USD (3 USD per share).
Note: The information displayed on this page is for educational purposes only and is not a personal recommendation or investment advice. Any quotes of financial instruments in the examples are for reference purposes only and do not reflect the current market situation.