What are CFDs? The term CFD stands for Contracts for Difference. CFD trading is defined as a contract or agreement between an investor and a provider to exchange the price difference of a financial product.
How do contracts for difference work?
The profit or loss of CFD trading is mostly determined by the price difference of an underlying asset. Hence, as its name implies, a contract for difference. The price difference is the price of the financial product during entry minus the price of the product after the exit. (Exit price – Entry price = Price difference).
For example, a trader is speculating the market and assumes that a certain company will increase in price. The current price of that company is trading at $48/$50, $48 is the sell price and $50 is the buy price, the spread is 2. The trader immediately opens a long position by purchasing 200 buy contracts. Later that day, the price of the company rises by $80. The trader then closes his position at $75. The entry price is $50 and the exit price is $75, its difference is $25. The trader gains a profit of $25 per contract. Because his overall contract is 200 he has a total profit of $5000 (200 contracts x $25 = $5000).
Spreads are part of CFD trading. Entering a position will show a loss equivalent to the size of the spread. Thus, if the spread is $3, the financial product should rise by $3 in order to start gaining profit.
Note that CFDs are leveraged products. Which means traders only need a small fraction of the actual asset price to open a position. This is also known as margin trading. It is important to keep in mind that leverage does not just multiply profits, it also multiplies losses. You can lose more than the capital you have invested.
CFD trading is a good derivative to earn money and gain profits. It gives traders a number of benefits and advantages. It gives investors access to speculate on the market without actually owning the financial product. It has no limits on when to enter or exit a position. It has no time constrictions and has no restrictions on what to do first; between buying first or selling first.
Here in Millennium-FX, we offer one of the lowest spreads available in the market. Our CFDs include equities, currencies, commodities, indices, and cryptos. Sign-up now and start trading one of the most versatile financial instruments in the market.