As it becomes one of the best options in trading all over the world and especially in the United Kingdom is CFD or Contract for Difference. Rather having some similarities with other forms of trading like spread betting in certain ways, CFD Trading has come to have more structure in comparison.
Simply put, CFDs are agreements between two traders/parties where they coincide with an undertaking based on the close of the contract in which the differences between the opening and closing price multiplied by how many underlying assets are stated in the contract
CFD in a Nutshell
CFD Trading is, in a manner of speaking, is like an amalgamation spread bet and mainstream options contract. CFDs are mainly traded in a way that is quite similar with regular shares.
Brokers quote prices that are mainly the same as the underlying market price and you are able to trade in any form of quantity just like in regular shares with other advantages like exposure to the market through leverages.
As a trader you are able to gain more with CFD Trading unlike other forms of trading that will require more money in your account.
Leverages and Commissions
When trading in CFD however, you are charged with a commission by your broker for a trade and the sum value of the transaction is the amount of CFDs you sell or buy and is multiplied by the market price.
As stated earlier however, you are to only pay a percentage of the trading position you initially have instead of being forced to pay in full value like in other forms of trading.
This enables you to become liquid or enables you to have a diverse portfolio. You are able to access a bigger amount you may not have been able to acquire when trading in other forms of markets.
CFD Trading Example
As an example of CFD trading,.you are able to make short or long trades just like with options and spread bets
JPMorgan Chase currently trades at 550–550.5 and you believe that JPMorgan Chase will increase in price and you decide to trade and buy 10,000 shares as a CFD at 550.5.
The sum value of the contract you are about to trade is at $55,050 but you will only be required to place an initial 10 percent deposit of $5,505. The perceived commission to be charged on the trade is low and due to the fact that you are buying a CFD, you will not be required to pay stamp duty.
A week has passed and you check and confirm that your projection is right and the share price of JPMorgan Chase increases to 555–555.5.
You conclude by closing your position by selling 10,000 JPMorgan Chase CFDs at 555.
Your trade is able to gain a 4.5 pence per share profit or $450 in total value..
When calculating your profit you will need to make sure you have included the account commissions and other charges in financing that you had during the transaction.Usually, Financing chargers are made on a LIBOR basis plus interests that are agreed on the daily.
In bearish or Short trades, it works the same way just like in long trades but the difference is that you gain money when you borrow to sell for what you project as a high price and immediately buy the same asset when the price begins to fall.