Education - Understanding CFDs
Learn about CFDs and how to trade them with RockGlobal
What are CFDs?
“Contracts for Difference” (CFD) is a popular type of derivative product. Trading CFD’s enables investors to exploit profits on the price movements of the underlying financial assets, such as shares, indices, forex, treasuries and commodities.
Instead of owning the actual asset (e.g. physical shares, currency pairs, or commodities), CFD’s are an agreement to exchange the price difference of the underlying asset from the time that the contract is opened to the time it’s closed. Even though the investors never actually own the asset, they exploit benefits when the price moves in their favour, and vice versa.
CFD’s are leveraged, which means that only a small percentage of the full value of the position will be needed to be deposited as capital. This is known as trade on margin. On one hand trading on margin will magnify investors’ return, however on the other hand losses are magnified when there’s a losing trade.
It is possible that the losses are bigger than the initial capital the investors have put in.
Benefits of trading CFDs
With trading CFD’s, no matter where the price goes (up or down), you can get benefit either way by buying (going long) or selling (shorting) the product. CFDs are commonly used as a way of hedging the existing portfolios. CFDs can be trade on margin (leveraged), a way to exploit bigger profit with limited capital.
For example, to buy the equivalent of 100 CFD shares of the US100 Index with RockGlobal, you may only need to deposit 1% of the total position value that you might have to pay if you were buying physical shares from a stock broker.
If each share cost $6,952 then you would only need to deposit $6,952 of position margin with us (1% of $695,200 = $6,952), spreads exclusive.
| GOING LONG US100 INDEX | |
|---|---|
| Price |
Bid US 6.9400 Ask US 6.9500 |
| Enter Trade | Buy 1000 shares at US 6.95 per share |
| Margin Required |
US $6950.00 Margin = Number of shares x price x margin rate (10%) |
| Profit Scenario |
After entering the trade, US100 Index rallies to US 8.56 over the next few days at which point you decide to close out your trade. Gross Profit = US $1,610 8.56 (Sell Price) – 6.95 (Buy Price) = 1.61 1.61 x 1000 = $1,610 |
| Loss Scenario |
If US100 Index decreases in value over the life of your trade. You close the position at US 5.80 Gross Loss = -US$ 1,150 5.80 (Sell Price) – 6.95 (Buy Price) = -1.15 -1.15 x 1000 = -$1,150 |