CFD Education
What is a CFD?
A CFD (Contract for Difference) is an agreement that allows investors to settle the difference in value between the price at which the contract was opened and the price of when the contract was closed, without physically purchasing the underlying instrument.
CFDs can be used to buy or sell a wide range of financial instruments such as stocks, shares, bonds, indexes, raw materials, without entering into any obligations of the underlying making them the most advantageous and flexible products on the market. CFDs offer the possibility of showing a profit when markets are falling, offering efficient hedging of your current positions at cost effective levels.
CFDs are margin instruments where the investor does not have to pay for the full value of his position and instead can submit a deposit, or margin, leaving him with available capital for other trading operations.
CFDs are a simple alternative to futures trading, where sometimes margins and dimensions of agreements prohibit investors to use this market. CFDs allow for strong leverage trading and reduced levels of collateral on the Futures market.AFX Capital offers clients the opportunity to easily trade CFDs across various markets including stock indices , Brent, WTI, corn, soya and many other commodities.
Types of CFDs
The use of leverage is only one of the few advantages of trading CFDs for stock indexes when covering your stock portfolio at a time of falling markets or when speculating about rising markets.
Gold, Silver and Platinum are risk free, safe haven goods which every investor at a time of economic uncertainty would like to have in their portfolio. Trading CFDs with precious metals at AFX Capital means the investor has the essential tool to plan his own trading strategies.
At AFX everything is made simpler and efficient with the trading of CFDs including Brent, WTI and natural gas, whereas before the only way to determine an increase in the stock prices of oil or natural gas was the purchase of a futures instrument.
Speculation of corn and other commodities such as soya, sugar, and cocoa is now possible thanks to the narrow margin requirement of trading CFDs.
Advantages
- Diversification - Trading CFDs is fast and easy and with the wide range of products that AFX offers its clients it allows them to carry out a variety of trading strategies monitoring only the profit and loss.
- Leverage/Margin - The advantage of leverage allows investors to use only a portion of their investment capital, this means they can open a position with larger amounts depending on their financial capacity.
- Long/Short - CFDs offer the option of going long or short depending on different investment strategies such as coverage, speculation, and market conditions.
CFD Trading Example
An investor deposit €10,000 in a AFX Capital Markets Trading Account.
| Spread | Minimum Size | Leverage | Tick size | Tick value | Lot Value | |
|---|---|---|---|---|---|---|
| Gold | 60 Pips | 0.1 Lot | 1:100 | 0.01 | $1.00 (Per 1 lot = 100 ounce) | 1 lot = 100 ounce |
The account to trade Gold is set to a 1% margin or 100:1 Leverage. This means that for every 1 lot (1 lot= 100 ounce) opened, the investor must maintain 1% of the number of lots opened multiplies by gold quotes in that moment in Margin (= 1% of 100 x quotes Gold) convert in €.
The investor expects the price of Gold rise and therefore decides to buy 1 lot of Gold.
The market quotes Gold 1239.40$ -1240.00$. The investor buys Gold at 1240.00$.
- Client Account Report — Day 1
| Balance (EUR) | Equity (EUR) | Lots Open # | Used Margin (EUR) | Usable Margin (EUR) |
|---|---|---|---|---|
| € 10,000 | € 10,000 | 1 | 976.38€ | 9,023.62€ |
| (1) | (2) | (3) | (4) | (5) |
(1) Balance = Deposit (€10,000) + Sum of Realized Profit & Loss (€0) = €10,000
(2) Equity = Balance (€10,000) + Sum of Unrealized Profit & Loss ($0) = $10,000
(3) # Lots open = Investment (100 ounce) / Value of one lot (100 ounce) = 1 lot
(4) Used Margin = 1240$ x Value of one lot (100 ounce) x Margin (1%)/ 1.2700 €/$ = 1240 x 100 x 1% = 1240$/1.2700 = 976.38€
(5) Usable Margin = Equity (€10,000) — Used Margin (€976.38) = €9,023.62
The Gold has risen and quotes $1242.00 − $1242.60
The investor decides to take his profit and enters a sell market order in the AFX trading platform. The order is executed instantaneously and the investor sells 1 lot at 1242.00.
The investor earned 200 pips (1 bip = $ 0.01).
The profit is the difference between the open and closing price times #lots, convert in €:
$1242.00 − $1240.00 = 2.00 x 100 (1 lot = 100 ounce) = 200/ €/$ 1.2700 = €157.48
- Client Account Report — Day 2 (AFTER TRADE EXECUTION)
| Balance (EUR) | Equity (EUR) | Lots Open # | Used Margin (EUR) | Usable Margin (EUR) |
|---|---|---|---|---|
| € 10,157.48 | € 10,157.48 | 0 | 0€ | 10,157.48€ |
| (1) | (2) | (3) | (4) | (5) |
(1) Balance = Deposit (€10,000) + Sum of Realized Profit & Loss (€ 157.48)= €10,157.48
(2) Equity = Balance (€10,157.48) + Sum of Unrealized Profit & Loss (€0) = €10,157.48
(3) All positions are closed, therefore # Lots open = 0
(4) Used Margin = # Lots open (0) x Value of one lot (100 ounce) x Margin (1%) = €0
(5) Usable Margin = Equity (€10,157.48) — Used Margin (€0) = €10,157.48
Note: For simplicity's sake, we have fixed the Eur/Usd quote at 1.2700.
