“What are CFDs

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 14.04.2020>

Dear reader,

Hi! If you are interested in trading CFDs online please read carefully the below article so you can be prepared and fully informed of the risks involved. You should take a look at this short article in which I explain what are CFDs.

 

First of all, before explaining what CFDs are, it is more appropriate to refer to their classification category of assets. A CFD is first of all a Derivative contract.

Derivatives: A derivative is a contract that derives its value from the performance of an underlying entity. A financial security with a value that is reliant upon or derived from, an underlying asset or group of assets. This underlying entity can be for example an asset, index, interest rate.

CFDs are ‘contracts for difference’, and are considered complex products, that offer the opportunity to trade on leverage. CFDs were and are still often advertised to inexperienced retail clients, in most cases these clients do not understand the risks involved. This product is a leveraged contract entered with a broker on a bilateral basis, settled with cash. In the case of currencies, it involves simultaneously buying and selling of two currencies. The price of the CFD is derived from the underlying FX pair which is the current spot price.

CFDs are leveraged products and leverage is customized and set by the client. It involves margin trading and so requires extra caution. It gives you the opportunity to realize large profits but at the same time you risk extensive losses if the market is against you. When the exposure is leveraged you only require a small proportion of the notional value of the contract to be put down upfront as initial margin.

The CFD on FX pair does not have a pre-defined maturity date and is therefore considered open-ended. At the end of the day any open positions are rolled over and charged a daily swap fee.

This product is classified as the one with the highest risk rank 7 out of 7. The highest risk among other products. It rates the potential losses from the future performance of the product at a very high level. You are also subject to risks related to internet failure , communications failures and delays or account password theft.

 

Trading CFDs

Investors can find opportunities in both rising and falling markets.  If they think the price is going up, they buy, and if they think it’s going down, they sell.

 

Trading using a Margin Account – CFDs are traded on margin?

With a margin account, you are essentially borrowing money from someone. You pay interest on this borrowed money if carried overnight. (overnight charge or earn from interest rate differential – Swap). You are responsible to pay this money back, regardless if you win or lose.

Trading CFDs involves buying with the ASK price and selling with the BID Price.

 

Asset Classes – Let’s talk about Currency Pairs:

As the pair moves lower, the Base currency is less expensive versus the Quote currency, thus a lower price. As the pair moves higher, the Base currency is more expensive versus the Quote currency, thus a higher price.

 

Spread, is the difference between the ASK and the BID price. When there is high liquidity in the market, the spread is very small. Depending on the Prime Broker or LPs it is formed and is called RAW spread.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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