CFDs

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A CFD (contract for difference) is a contract between a buyer and a seller and is the easiest and most well-known way to trade commodities and indices because of their simplicity, ease of trade, leverage, ability to short sell and effectiveness. CFDs are cash settled and when you buy a contract you do not own the physical product. Instead you simply profit from the price movement of the underlying.

CFD (Contract for Difference) is an agreement between you and your broker to exchange the difference between the opening price and closing price of a contract. Hence, you bet on price movement of the underlying asset (a stock, commodity, etc.), but you do not own the asset.

The advantages are a higher leverage (you can use even more money), no short selling limitations (can be shorted at any time), variety of trading options (stock, index, treasury, currency and commodity CFDs).

Read about how to open a live account and start trading and using all benefits of the platform here.

 

HOW A CFD WORKS?

If a stock has an ask price of $25.26 and 100 shares are bought at this price, the cost of the transaction is $2,526. With a traditional broker, using a 100% margin, the trade would require the sum of $2,526 cash outlay from the TRADER. With a CFD broker, normally only a 0.5-20% margin is required, so this trade can be entered for a cash outlay of only $126.30 (example: 5% margin).

It should be noted that when a CFD trade is entered, the position will show a loss equal to the size of the spread. So if the spread is 5 cents with the CFD broker, the stock will need to appreciate 5 cents for the position to be at a breakeven price. If you owned the stock outright, you would be seeing a 5-cent gain, yet you would have paid a commission and have a larger capital outlay.

 

THE ADVANTAGES:

Higher Leverage CFDs provide much higher leverage than traditional trading. Standard leverage in the CFD market begins as low as a 0.5% margin requirement. Depending on the underlying asset (shares for example), margin requirements may go up to 20%. Lower margin requirements mean less capital outlay for the TRADER/investor, and greater potential returns. However, increased leverage can also magnify losses.

 

THE DISADVANTAGES:

Potential pitfalls. For one having to pay the spread on entries and exits eliminates the potential to profit from small moves. The spread will also decrease winning trades by a small amount (over the actual stock).

So, in conclusion, CFDs provide an excellent alternative for certain types of trades or TRADERs, such as short- and long-term investors, but each individual must weigh the costs and benefits and proceed according to what works best within their trading plan.
Now that you’ve learned some things about CFDs. We suggest that you go to NAGA TRADER and explore CFDs trading. Use the platform extensively to take advantage over this interesting instrument.

Read about how to open a live account and start trading and using all benefits of the platform here.

 


 

If you need further assistance, please do not hesitate to contact our staff.

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