CFD stands for Contract for Difference. CFDs enables traders and investors to speculate on the price movements of various assets without owning them. With over 200+ products such as currencies, metals, commodities and indices, traders are given the chance to profit from the underlying asset price movements.
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CFDs are bought and sold like any other trading instrument. Therefore, if you believe the price of Crude oil is going to rise then you would buy the Crude Oil CFD and finally, you would then close the position by selling the CFD. Your profit or loss would be the difference in the price of the CFD between the time you entered and closed the position.
Since CFDs are based on Commodity and Stock Index prices, traders use both technical and fundamental analysis to determine whether prices will rise or fall.
For example, if a large storm is expected, which could knock out oil supplies, a trader could buy the Crude oil CFD based on the assumption that a decrease in oil supply will raise the price of oil – if demand remains the same. Also, if a trader believes that stocks have risen too much and are overbought, he/she could sell a Stock Index CFD to profit on any drop in equity prices.
If you are looking to trade Commodities or Stock Indices such as gold, oil, the Dow Jones, or FTSE, then CFDs can offer you unique advantages and trading opportunities.
When you trade CFD, you enter a contract with your broker based on the change in price of the underlying asset over time.
For example, Crude oil CFDs track the price of the most current oil Futures. If the oil Futures are currently trading at $50/barrel, the CFD will be traded at a similar price. Therefore, if you buy the CFD when the price of oil is $50 and it rises to $55, you will gain $5 on the CFD, just as if you had bought the actual Futures contract.
But, unlike regular futures, CFDs are available for much smaller purchase sizes and with greater leverage. This makes CFDs an ideal product for investors who are looking to trade in the Commodity and Stock Index markets.
One of the greatest benefits of CFDs is that they can be traded in small sizes. Also, like forex instruments, large leverage is available for CFD trading. This compares to Futures contracts which are available only in large contract sizes and require a hefty minimum margin requirement per position.
For example – a futures contract on the S&P 500 is based on 50 times the value of the S&P 500 Index. Therefore, if the S&P 500 is trading at $1000, the value of the futures contract is $50,000, and each change of 1 point in the index leads to a $50 gain/loss in a futures position. Also, in order to hold that $50,000 position, you will need an initial margin requirement of $5000 in your account.
With CFDs, CMTrading allows you to trade position sizes of just a small fraction of the total value of the S&P 500. Therefore, the minimum position size in our example would only be $5000 (this compares to $50,000 above). Also, CMTrading has an initial margin requirement of only 2% of the contract size. Therefore, even if a CFD trader took a $50,000 position like in the real Futures contract, the minimum margin would only be $1000.