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CFD Trading Guide

What can you trade with a CFD

CFD Markets

Contracts for difference (CFDs) enable investors to trade the price movements of multiple financial instruments. Rather than trading instruments themselves, a CFD trader speculates on price ups and downs without owning the underlying asset.

The Capital.com app empowers its users to trade CFDs online, offering a choice of 200+ financial instruments: popular shares, the most traded commodities, the most watched indices and major currency pairs.

Trading CFD shares

A share represents a portion of ownership in a company. A shareholder of Tesla is in fact part owner of the company, entitled to a part of Tesla’s assets and profits.

The value of shares rises or falls together with the company’s value, giving grounds for speculating on these movements on a stock market. However, a trader can benefit from shares without owning them, by means of CFD trading.

In a contract for difference, shares are underlying assets that you don’t own physically, but the behaviour of their prices impacts the results of your trading. In both traditional and CFD trading, share prices are formed by the supply-demand correlation, the company’s earnings and predictions regarding its performance.

CFDs are traded online via a CFD trading platform with no need to go to a stockbroker, thus they are far more accessible than traditional stocks.

However, opening a CFD contract requires less funds than share trading, as CFDs are traded on margin. Thus, CFDs enable investors to speculate on stock price movements of the biggest, most valuable and popular companies.

Buying a CFD share contract is equivalent to going long on one share in the underlying company.

For example. Assuming the shares of company CPL are trading at £70.03/£70.05 (sell price/buy price), you predict the price will appreciate, so you buy 100 shares of CPL. Margin trading requires you to put in only 5% of the value. Thus, instead of spending £70.05 x 100 = £7005, you invest 5% x (100 shares x £70.05 (buy price) = £350.2

 

Capital.com offers CFDs on shares trading on the world’s major stock exchanges including the London Stock Exchange (LSE), the New York Stock Exchange (NYSE), the NASDAQ and the Frankfurt Stock Exchange (FWB). Traders can filter their choice of investments or diversify their portfolios with stocks across a range of sectors, such as energy, industrials, technology, healthcare, utilities and more.

Trading CFD indices

An index is a collective value of stocks traded on a particular stock market or belonging to a particular sector or economy. It’s an aggregate value that helps track changes in what the index represents.

An investor who wants to speculate on the performance of a whole economy or industry can trade CFD indices. Capital.com’s CFD trading platform enables investors to benefit from the movements in value of the most popular global indices, such as the NASDAQ 100, the FTSE100, the DAX 30, the DJIA, the Euro Stoxx 50 and the S&P500.

Let’s say you predict that the FTSE100 is going to appreciate, or that it’s hard times for the S&P500. The good news is that there are contracts for difference for both scenarios. The key advantage of CFDs is that trading can bring profit when the underlying asset rises or falls. The trick is to predict the direction right.

A single CFD is valued in the local currency, like GBP for the FTSE (the UK index), Euro for the DAX 30 (the German index) or JPY for the Nikkei 225 (the Japanese index). When you buy a CFD index, you invest a certain amount of the basic monetary unit per one point of the index movement.

Let’s say the S&P500 is trading at 2,476. Based on the recent economic data you predict that the index is going to drop. You open a short position (to sell) on 3 S&P500 CFDs and your predictions end up being right: the index depreciates to 2,426. Thus, your profit is as follows: (2,476-2,426) x 3 =150 (USD).

Suppose, the index rises by 60 points. Your predictions are incorrect and your loss is (2,476-2,536) x 3 = 180 (USD)

A CFD trader has to bear in mind the possible risks. The market price can go against their predictions and bring in serious losses.

Trading CFD commodities

A commodity is a tradable physical asset, such as agricultural product (wheat, sugar), metal (gold, silver) or energy product (crude oil, gas). Commodities are mainly traded in the form of futures. However, a CFD is another alternative of a derivative contract to trade commodities.

CFDs on commodities, as well as those on other markets, have two overwhelming advantages:

  • You don’t own an underlying asset physically.
  • Thus, there’s no need to store all those silver bars, when you buy Silver CFDs. You simply trade the price of the metal and you’ll never have to take on delivery.
  • Traders can profit when the price of the underlying asset rises or falls. It depends on the direction of the trade – ‘long’ or ‘short’.

When you open a CFD trade on a commodity, you pay a set amount of money for a standardised amount of the commodity. Commodities are measured differently. For example, with Capital.com a single Gold CFD is equivalent to 1 troy ounce. The minimum trade quantity for Silver is 50 troy ounces. The measurement units for Brent Crude Oil and US Crude Oil are USD per barrel (the minimum traded quantity is 1 and 10 respectively).

Trading commodity CFDs works this way: you think that Brent Crude Oil is going to appreciate and buy a CFD. Let's say the current price level of the underlying is $55 a barrel. You turn out to be right, and Oil rises to $58 as the contract terminates. Thus, your CFD provider has to pay you the price difference of $3 for a CFD that you own.

Bear in mind, that if you made the wrong assumption, you would have to pay those $3 (or the difference equivalent) to your CFD provider.

Trading Forex CFDs

Forex stands for foreign exchange, i.e. trading currency pairs. This is an extremely liquid OTC market, which is traded round the clock 5 days a week. Globally, the most traded currency pairs, or ‘the majors’, include EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD and NZD/USD.

In a pair, the value of one currency (base currency) is compared to that of the other (quote currency). For example, in the EUR/USD pair, the euro is a base currency and the U.S. dollar is the quote currency. If the pair is traded at 1.1808, it means that to buy 1 EUR you have to spend 1.1808 USD.

A Forex CFD is a popular way to speculate on a currency. In a contract, the buyer and the seller agree to exchange the value difference at the contract’s termination as compared to its beginning. In CFD trading, you trade a particular number of CFDs in the unit of the base currency. For example, if you trade AUD/USD your stake will be in the Australian dollars, for USD/JPY it will be in the U.S. dollars.

Imagine EUR/USD is trading at 1.1795/1.1797 (sell/buy).

Positive economic data leads you to predict that Euro is likely to rise against USD, so you buy 10 CFD contracts. Each CFD is equivalent to 10,000 of the base currency. Thus, by purchasing 10 CFDs on EUR/USD, you buy €100,000 at 1.1797, which equals $117,970.

Let’s say your predictions were right and EUR/USD rises to 1.1810/1.1812 (sell/buy). You decide to close your position by selling 10 CFDs at 1.1810. Thus, your profit is (1.1810 x €100,000) – (1.1797 x €100,000) = $130.

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