CFD Education

Basic of CFD Trading

Contracts for Difference (CFD) give traders all the benefits of owning a particular stock, index, or commodity position – without having to physically own the underlying instrument itself. It’s a simple and inexpensive trading option, to trade the change in price of multiple commodity and equity markets, with leverage and immediate execution. A customer enters into a contract for a CFD at the quoted price and the difference between that price and the price when the position is closed is settled in cash – hence the name “Contract for Difference” or CFD. CFD trading works like this: Instead of purchasing 1,000 Google or Facebook or Gold shares from a stockbroker, a customer could instead purchase 1,000 CFDs of that asset on Perfekt Capital. A $10 per share fall in the price of that particular asset would give the CFD customer a $10,000 loss. Alternatively, a $10 per share rise in the price would give the customer a $10,000 profit, exactly as if the trader had bought the actual shares on the Stock Exchange. It’s important to mention though, that with CFD trading, you can profit no matter which way the market moves. You can use CFDs to go “short” when you believe markets will fall (and close the position later by selling), or you can go “long” when you expect prices to rise (and close the position later by buying). Of course, selling at a higher/lower price than the purchase price produces a gain/loss accordingly.

Online CFD trading is increasingly growing in popularity over the past few years and we believe it is one of the best ways to trade the financial markets – period. There are many advantages to trading CFDs at Perfekt Capital.

  • At Perfekt Capital, you can trade CFDs with margins between 1% - 2% (which means leverage of up to 100:1). This enables you to enter bigger positions than you would be able to if you bought the actual underlying asset.
  • There is high liquidity: All Perfekt Capital CFDs offer competitive spreads with bid/ask quotes that are filled on the spot – without delay.
  • CFD trading enables you to trade in small and odd-size lots. Normally, this is not possible when dealing with the underlying asset itself.
  • Perfekt Capital offers commission-free CFD trading. Furthermore, Perfekt Capital offers free intra-day trading – positions that are opened and closed on the same day.
  • Please note that CFD trading is high risk/high reward, and that it is possible to lose your entire capital. Please be aware of the risks involved and trade wisely.

CFD or Contract for difference is an agreement between two parties, buyer and seller. The value of the contract is based on the underlying asset (for example, index, stock or commodity futures). Upon the contract expiration or when the parties make a decision to close the position, the seller pays the buyer the difference between the current value of the asset and its opening value, if the value of the underlying asset has increased. And, vice versa, if the value of the underlying asset has decreased, and the difference between the current and initial value of the contract is negative - the buyer pays it to the seller.
CFDs are derivative financial instruments by their nature that provide traders with an opportunity to make profit on price movements of various assets, allowing opening long positions when the asset prices go up and short positions, when the prices go down. The CFD value linked to the underlying asset moves in the same direction as the price of the underlying asset and depends on the same factors. At the same time being much more flexible and accessible, contracts for difference present a number of advantages, such as low cost, trading with leverage and market diversification, compared to trading the underlying asset directly.

CFD (Contract for Difference) is a contract between two parties known as "buyer" and "seller", the price of which is based on the base asset, for example an index, stock or commodity future. CFD trading offers traders a number of advantages over trading the underlying asset directly. In addition to trading currencies contracts for difference significantly increase trading opportunities for traders using various classes of financial assets in their trading strategies. Enjoy the following benefits of CFD trading:

  • Fast access to various financial markets and the most liquid assets through one trading account, providing considerable opportunities for investment diversification;
  • Increase of potential profit due to using leverage;
  • Low transaction costs and absence of hidden commissions;
  • Opportunity to open both long and short positions without any limitations;
  • Ease of trading from anywhere in the world through computer and trading platforms.

Moreover, only with Perfekt Capital Limited you get additional unique benefits while trading CFD:

  • Unique Gold Instruments available in trading platforms of Perfekt Capital Limited ;
  • Unique continuous CFD on commodity futures and, indices with an opportunity to hold positions as long as desired and without any need to track expiration dates of the futures;
  • Over 100 CFD on indices, stocks and commodities.

Today the CFD market has developed a lot since the first CFDs and offers huge variety of underlying financial instruments ranging from stocks, equity indices and currencies to commodities, bonds and derivatives. CFDs (Contracts For Difference) are traded in the most of the developed world. Because of the ability to trade CFDs on margin those are actually financial instruments that are generally traded by financial institutions to hedge against ownership in original assets, and by individuals and retail traders that speculate on its price direction. CFDs were firstly traded on stocks of the London Stock Exchange in early 1990, initially available to only institutional traders to hedge their exposure on the underlying share. At the end of 1990s CFDs were introduced to retail traders and together with the development in computerized system became very popular. Thanks to low costs, leveraged positions and time saving benefits, CFD trading has been gaining more and more popularity throughout the past decade. Perfekt Capital Limited offers significant amount of CFD instruments in different markets. Traders can select different CFDs from all of these markets, or specialize in one market. Indices:Stock Market Index or just Index is a number that measures a certain sector of the stock market. At Perfekt Capital Limited we offer a wide list of CFDs on major world indices including S&P 500, DAX 30, FTSE 100, Nikkei 225.
Stocks: Stock (also known as an equity or a share) is a type of security that shows the proportional part of ownership of a corporation. Perfekt Capital Limited provides a wide selection of CFDs on Shares of world’s leading companies such as Apple, Coca Cola, Google, Facebook, etc.You can trade stocks with one of the lowest tight spreads in the market.

Perfekt Capital Ltd provides investors with a variety of global trading opportunities across different international markets. Now it is possible to trade in Commodity Market as well. Perfekt Capital Limited offers CFDs on Oil, Coffee, Oats, etc
Example: If you are still asking “What is a CFD?” it is worth to bring an example that will help you to imagine it in practice. Let's say the initial price of Apple stocks is $100. You conclude (buy) a CFD contract for 1000 Apple stocks. If the price then goes up to $105, the sum of the difference, paid to the buyer by the seller will equal to $5,000. And vice versa, if the price falls to $95, the seller will get the price difference from the buyer equal to $5,000. The contract does not imply physical ownership or purchase/sale of the underlying stocks that enables investors to avoid the registration of the ownership rights for the assets and the associated transaction costs.

CFD imitates the profit and loss for real purchase or sale of an asset. The contract provides an opportunity for trading in the underlying market and make a profit without actually owning the asset. Let us assume that you expect the rally in metals market to continue and you want to buy 1000 stocks of Freeport-McMoRan Copper & Gold Inc. (FCX), the world's largest publicly traded copper producer. You can buy these stocks through a broker paying a considerable portion (according to the regulatory norms of the Federal Reserve, the initial margin is currently 50% in the U.S.) of the total value of these stocks and take a leverage from the broker for the other part and, moreover, to pay commission to the broker. Instead, you can buy CFD contract for 1000 FCX stocks. To buy this contract you would have to make much lower margin deposit (2.5% of the total value of stocks provided by Perfekt Capital Limited ).

Day trading is defined as the process of buying and selling various assets within the same trading day. This means that a trader or an investor is free to make as many trading transactions as he would like within a single day. As leveraged trading enables opening bigger positions with limited deposit amount, trading CFD is possible even in cases of slight fluctuations of the asset value during one day.

Majors against the US Dollar EUR/USD Open position: Buy 1 lot (100,000) EUR/USD at 1.29530 Close position: Sell 1 lot (100,000) EUR/USD at 1.29930 1.29930 – 1.29530 = 40 pips 40 pips * $10 = $400 profit b. GBP/USD Open position: Buy 5 lots (500,000) GBP/USD at 1.52270 Close position: Sell 5 lots (500,000) GBP/USD at 1.52990 1.52990 – 1.52270 = 72 pips 72 pips * $50 = $3600 profit (Remember: for 1 lot each pip is worth $10, for 5 lots each pip is worth 5 *$10 = $50)

A CFD (Contract for Difference) is a universal trading instrument, which has gained much popularity in the last years. With the help of CFDs, it has become possible to trade on the price movements of various financial instruments, without the need to possess them physically. Nowadays, CFDs allow to trade not only stocks but also major indices, currencies and commodities.

Leverage allows you to use your money to make larger trades and hopefully realize greater profits. It increases both your risk and your potential profits. Leverage actually means the percentage of a trade that your broker will lend you when you open a trading position. However, unlike regular loans, there is no interest to be paid on leverage loans. Your leverage depends on the size of the trades you make relative to the amount of money in your trading account. PERFEKT CAPITAL LIMITED allows you to increase your trade size through leverage by using your deposits as margin. Margin is your protection against trades going against you. Your margin is the minimum amount of money required in your account. At PERFEKT CAPITAL LIMITED, the margin requirement is 0.5%; this means we require 0.5% of your trade size in order to lend you the amount you need for the trade. For example, if you are trading with a $100,000 position size, then you will need $500 (0.5%) in your account in order to make the trade The table below shows the minimum amount of money you need to trade a position of $100,000 using various common leverages (remember, the margin is the amount of money you must maintain in your account).

CFD is a flexible investment instrument. When you believe the market will rise you can make a profit by buying CFD which is known as going long. You can also speculate on falling prices by selling CFDs, known as going short. Holders of open buy positions on Stock CFD get a dividend adjustment equal to the announced dividend payment amount, if they have a long position open on the instrument at the beginning of trading session on the adjustment payment day (coincides with the ex-dividend date). In contrast, the dividend adjustment is deducted from customer's account in case of a short position.

Rollover (or Swap) is the interest paid or earned for holding a Forex position overnight. Each currency has an interest rate associated with it. As forex is traded in pairs, every trade involves not only two different currencies, but also their two different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade. The PERFEKT CAPITAL LIMITED platform automatically calculates and reports all rollover for you.

As the world continued to tear itself apart in the Second World War, there was an urgent need for financial stability. International negotiators from 29 countries met in Bretton Woods and agreed to a new economic system where, amongst other things, exchange rates would be fixed.
The International Monetary Fund (IMF) was established under the Bretton Woods agreement, and started to operate in 1949. All exchange rates changes above 1% had to be approved by the IMF, which had the effect of freezing these rates. By the late 1960’s the fixed exchange rate system started to break down, due to a number of international political and economic factors. Finally, in 1971, President Nixon stopped the US dollar being converted directly to gold, as part of a set of measures designed to stem the collapse of the US economy. This was known as the Nixon shock, and lead to floating rate currency markets being established in early 1973. By 1976, all major currencies had floating exchange rates.
With floating rates, currencies could be traded freely, and the price changed based on market forces. The modern Forex market was born.

If you believe that stocks you own are going to fall in price but still want to hold them, you can use the hedging strategy to protect your portfolio from risks by opening a short CFD position on your stocks portfolio. Your profits from going short in CFDs will reimburse the loss from the falling prices of the assets in your portfolio. You will carry lower transaction costs compared to hedging by selling the physical stocks in order to buy them back cheaper later.

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