Considering trading CFDs? These versatile derivatives offer good potential for higher returns — but with this potential comes higher risk. High risk may result from the changes in the asset’s price to how much leverage applies to the position. A higher leverage leads to higher risk levels. There are some fundamental aspects you should be aware of before you start trading CFDs.
What are CFDs?
A CFD (Contract for Difference) is an agreement to exchange the difference in the value of an asset from the time the contract is opened until the time at which it is closed.
With a CFD, traders never actually own the asset or instrument, but they can still benefit if the market moves in their favour. This is because a CFD is a derivative product, which has a value based on an underlying asset.
Trading CFDs is risky, and it is highly recommended to gain knowledge before you start trading. In case you do not have any experience, trading CFDs may not be appropriate for you. Before you start trading with us, it is recommended that you complete the appropriateness questionnaire.
How does it work?
As derivative products, CFDs allow traders to speculate on price changes without actually owning any of the underlying assets involved. They can be used to trade a variety of financial markets like shares, forex, commodities, indices or bonds. CFDs are traded in contracts, which means that you take out a certain number of contracts, and each is equal to a base amount of the underlying asset. With Fortissio you can trade CFDs on a wide range of markets, including shares, indices, commodities, foreign exchange and many more. Trading a share CFD, for example, is in many ways similar to traditional share trading, but with added advantages and risks that are typical of trading on the stock market.
Please make sure you read every product description (currencies, indices, etc.), as well as the given examples, to better understand the risk that trading with CFDs involves. The risk may result from changes in the asset’s price or how much leverage is applicable in the open position.
Five considerations for CFD trading
These are some of the most important rules to consider when trading CFDs related to risk management and careful planning. While there are various trading methods that can be developed to help you work out how and why you will place a trade, these considerations are fundamental.
1) Trading CFDs can be risky - Invest only funds you can afford to lose.
2) Pay close attention to managing your existing trades — don’t just look for new trades.
3) Try to gain as much knowledge as possible before you start. Without knowledge, trading CFDs can be very risky. Please note that knowledge is not a guarantee of success.
4) Be aware of the risk that you’re exposed to — both on individual positions and in your portfolio as a whole.
5) Understanding how to use the PROfit platform is highly important before you begin your trading with Fortissio.
How to trade CFDs
When trading shares, the investor actually has an ownership in the company. If the prices of the shares increases, the investor’s profit is actually the difference between the buying price and the selling price. In case the share price drops, the loss is calculated as the difference between the buying and the selling price. This implies to any share the investor owns.
When the investor trades ounces of gold, his possible profits will come from the difference between the buying price and the selling price for every ounce of gold he had purchased. In case the prices fall, investor’s loss is again the difference between the buying and the selling price for each gold ounce he has.
It is important to note that, when trading CFDs, the investor the doesn’t own the actual share or gold ounce, but only the contract on the price value of the financial instrument.
For more information about trading conditions and financial instruments offered by Fortissio, follow the link:
Product Sheets and costs
Examples for trading CFDs
Let’s suppose that the investor thinks that gold price will increase so he buys 10 ounces of gold with a current buying price at the gold shop is $1,200 per ounce. He would have to pay $1,200 per ounce for 10 ounces of gold:
10oz X 1200 = $12000
Let’s say that GOLD price reaches $1,250, then the investor can sell the ounces and collect the profits:
10oz X 1250 = $12500 hence profit is 12500 – 12000= $500
However, let’s say that the prices fall by $50 and go to $1,150 per ounce and the investor sells the 10 ounces, then his loss will be $500:
10oz X 1150 = 11500 hence loss is 11500 – 12000= -$500.
CFDs with an expiry date
As CFDs are traded on the price value of other financial instruments and these instruments have an expiry date, the CFDs will also have the same expiry date.
Please find all CFDs with their expiry dates here.
See examples below:
CL (Crude Oil) is being traded as a future contract in the NYMEX, with an expiry date signifying that the contract will be closed at the end of the indicated date. In this case the CFD will also have the same expiry date and investors will not be able to trade it after this date. As any open positions will be automatically closed, the investor will have to get into a new CFD contract that follows the new future contract with a new expiry date, in case he wants to keep the Crude Oil CFD contract.
What is Margin?
As the above examples show, when trading CFDs the investor owns a contract, that ‘’binds’’ him to pay for any difference in the price with a loss and the other party commits to pay him the earning, it is not necessary for the investor to actually own the gold. Because of that, there is no real purchase of gold, but only a contract, so the investor will have to provide the margin to secure the potential losses that he might suffer.
The investor buys 5 ounces of Gold via CFDs at a price of $1,200 per ounce, amounting to a total trade value/exposure of $6,000 (= 5 ounces x $1,200). The minimum margin for Gold trading with Fortissio is 5%. Therefore, the investor should have a minimum of $300 ($6,000 x 5% = $300) available margin in his trading account, in order to secure any potential loss for the specific trade. Using a small amount of funds in order to have a larger exposure is referred to as “Leverage”. The investor leverages his $300, to have a higher trade for the value of $6,000. The investor is liable for the leveraged amount in all aspects, whether it be profit, loss, overnight fees, etc.
What is Leverage?
A leverage of 1:30 means that the investor can have a maximum trade value/exposure of 30 times his account equity, e.g. an investor who deposits $1,000 to his trading account will have the maximum ability to trade with $30,000. The investor will be fully liable for the trade outcome, whether it be profit, loss, fees, spread value, etc.
An investor who makes a deposit on his trading account and wishes to buy 10 ounces of Gold via CFDs at market price, is allowed to trade in Gold with a leverage of 1:20. The investor opens the trading box available on the trading platform and creates the requested contract details of 100 ounces of Gold. The trading platform calculates the minimum margin to open the trading position
i.e. trade value = 10 ounces x buying price $1,200 = $12,000 (Total Exposure).
The margin with 1:20 leverage (5%) = total exposure $12,000/20 = $600. This means that the investor has $1,000, therefore he has more than the minimum required and is able to open a position.
What is Liquidation?
In a highly unstable and fast moving market it is possible for an investor to lose his capital, which in online trading is also known as liquidation.
An investor purchases 100 ounces of Gold via CFDs and the price per ounce is $1,200, amounting to an exposure of $120,000. If the Gold price drops by 0.85% within a period of 30 minutes, this fast moving change will put the investor’s equity at risk and he will incure a loss of $1,020 ($120,000 x 0.85%. The investor will lose all his capital at once and without being able to respond to the loss.
When the client is at risk of liquidation, he will receive a relevant popup warning on his trading platform. However, when the investor is not logged in to his platform, he needs to be aware that there is risk of liquidation.