CFDs Explained

Times of low volatility in the foreign exchange market can be frustrating for traders, especially for intraday traders and scalpers. Luckily, there are CFDs which can give traders the ability to find opportunities in other markets when there are none in the currency market.

A contract for difference (CFD) is a contract between a trader and a broker. At the end of the contract, which is when the trader closes the position, the two parties exchange the difference between the opening price and the closing price of the position. There are CFDs based on a variety of assets, from shares to stock indices and commodities.

Example 1:

  • Trader A buys 10 S&P 500 contracts at a price of 2070 with a stop loss at 2050 and take profit at 2100.
  • The S&P 500 index rises to 2100 and the CFD position will be closed.
  • 2100-2070 = 30 x $1 x 10 = $300
  • Trader A realised a profit of $300 on the trade.

Example 2:

  • Trader B sells 5 contracts of Gold at a price of 1150 with a stop loss at 1165 and take profit at 1120.
  • Gold rises to 1165 and the stop loss orders gets triggered.
  • 1165 - 1150 = 15 x $1 x 5 = $75
  • Trader B realised a loss of $75 on the trade.

The main advantages of CFDs are their simplicity and low cost of trading. Trading futures on exchanges like the CME or ICE requires significantly more capital, there is less flexibility and the terms & variety of order types used may be overwhelming to someone who is not a professional trader. With AxiTrader, you can have access to a wide selection of CFD contracts and the low spreads will especially benefit short-term traders.

CFDs also give you the opportunity to hedge your exposure to other asset classes. For example, if you own stocks in your long-term portfolio, but think that the stock markets will have a correction in the near-term, you can take advantage of this by going short a specific stock index (e.g. the S&P 500 if you own stocks which are part of the index). Trading commodities through CFDs is simple as well. When trading precious metals CFDs, there are no physical transactions, you are only speculating on the price of the underlying asset.

Here is an overview of the CFDs AxiTrader is currently offering:

  • WTI Crude Oil - West Texas Intermediate is a crude oil used as a benchmark in oil pricing. It is the most closely watched oil price along with the Brent Crude.
  • FTSE 100 - A stock index of 100 companies with the highest market capitalization listed on the London Stock Exchange. The total market cap of the index almost reached 2 trillion GBP at the beginning of the year.
  • CAC 40 - A stock index of the 40 most significant companies listed on the Euronext Paris. An independent committee is picking the 40 companies out of a list of the 100 companies with the highest market cap traded on the Euronext.
  • DAX 30 - A stock index consisting of the 30 largest companies, in terms of order book volume and market cap, traded on the Frankfurt Stock exchange.
  • DJ 30 - The Dow Jones Industrial Average - a price-weighted average of the 30 most important stocks traded on the NYSE and the NASDAQ.
  • S&P 500 - The most followed stock index in the US and one of the most important internationally as well. The S&P 500 is based on the 500 largest companies listed on the NYSE and NASDAQ by market capitalization.
  • HSI - The Hang Seng Index is based on the 50 largest companies on the Hong Kong Stock Exchange (HKSE) by market capitalization.
  • SPI 200 - The S&P/ASX 200 index, based on the 200 largest companies listed on the Australian Securities Exchange by market capitalization.
  • Gold – The most popular precious metal, widely used in jewellery, electronics and as an investment.
  • Silver – A metal used in various industries, but also as an investment in form of coins and bullion.
  • Palladium & Platinum – Metals mostly used in industries, but they have become increasingly popular as investments in the early 2000s. Prices are usually more volatile than those of Gold and Silver.

Trading global markets – from stock indices to precious metals and oil – has never been easier than today. Take advantage of it.

For more information please visit our CFDs page.

 

 

Contributed by Milan Cutkovic  

The information provided here has been produced by third parties and does not reflect the opinion of AxiTrader. AxiTrader has reproduced the information without alteration or verification and does not represent that this material is accurate, current, or complete and it should not be relied upon as such. The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.