CFD stands for Contracts For Difference, as its name suggests it is a contract between two parties “buyer” and “seller”, that the seller will pay the buyer the difference between the current value of an asset and its value at contract time if the price of security increases, and the buyer will in return pay the seller the difference in price if the price of the security decreases.
With CFD trading, you can predict that the market will rise, or fall. If you predict correctly and the market moves as per your prediction, you will make a profit of your CFD size multiplied by each point that the market moves. If market moves against your prediction, you will make a loss of your CFD size multiplied by each point that the market moves against you. In effect CFDs are financial derivatives which allow investors to take long and short positions on underlying financial instruments and so are often helpful to speculate on those markets, and unlike futures contracts CFDs have no fixed expiry date or contract size.
CFD trading essentially allows you to trade on a huge range of markets, without physically purchasing the underlying instrument, and make a potential profit if the market goes down, as well as up.
CFDs are an efficient means of trading shares, indices, commodities, and currencies.
Let’s say the BSE 100 is currently trading at 4500 and XYZ CFD.com is quoting a spread of 4499 – 5000 on the BSE.
Say you believe the BSE 100 index is going to rise and buy 5 Index CFDs at 5000. Let’s say the margin requirement is only 10%,
Value of trade is 5 x 5000= Rs 25,000 , but you only need to pay 10% which is Rs 2500.
A week later the BSE 100 index has risen and the daily BSE spread is now 5200 – 5302 and you decide to close the trade and take your profit.
You place a sell or use the Bid price.
Your profit calculation is as follow:
Closing price – opening price = 5200-5000 = 200
5 CFD contracts = 5X Rs 200 = Rs 1000
commission say flat fee -opening = Rs 50
commission say flat fee -closing = Rs 50
Interest for holding onto the long trade = Rs 100
Overall profit = Rs 1000-50-50-100 = Rs 800
Features Of CFDs
- CFD shares are never physically bought or sold.
- With CFDs, you receive dividends but you don’t actually own the share.
- No stamp duties and exchange fees to pay
- CFDs have no time limit which means there is no expiration dates for the trade
- The price you see is the exact price of the underlying stock or the instruments you are trading
- You can take short or long positions
- CFDs trade on margin, typical 5-30% of the total value of the of the trade required for the trade
- you will receive interest if you go short
- diversify your investments in a number of different markets
- CFDs allow investors to benefit from the capital gains from a particular stock.
- Make profit irrespective of market fluctuation, that is, you can trade both short and long with a CFD; you have the freedom to trade what you want; and there are no limitations to the number of shares you trade.
- Require low margin i.e you need to invest only a small portion of the total value of contract
- Trade from any point of the world via Internet
- Guaranteed order execution. To be able to put a purchase order regardless of the sort that would be executed automatically;
- CFDs have low commission cost (starting from 0.05%) as compare to other means of trading
- Diversification. The Clients individuals Company employ a possibility to trade many financial instruments.
- Risk : Your prediction can go wrong, It is possible to lose much more money than you put down in the first place.