What is CFD investing?
The term CFD (Contract for difference) means «contract for difference». Performing transactions with CFDs allows you to take a position on the value of the instrument and subsequently profit from changes in this value. It is important to remember that by buying or selling derivatives (including CFDs), you do not become the actual owner of this product. This saves you from numerous duties, such as UK dealing taxes, because all you do is just earn on price movements for the underlying asset.
The contract itself is a specific agreement between two parties in which you get the right to receive the difference between the opening and closing price of the instrument, hence the name «contract for difference» (CFD).
The process of performing transactions with CFDs
In contrast to traditional forms of making transactions with CFDs, it allows you to profit both from falling prices on the market and their growth.
If you think that the price of a particular instrument will increase, you open for purchase (in other words-enter a long position), and the more the price eventually increases, the greater the profit you will get.
If you think that the price of the instrument will decline, you open for sale (enter a short position) and you will receive a profit proportional to the amount of the fall. However, keep in mind that if the markets go in the opposite direction from your making investment transactions, you will incur losses.
For example, if you think that Apple shares will fall in price, you simply open a short position (sale) on a CFD on Apple, and your profit will grow as the price falls from the level of your position opening. However, if the price of Apple shares starts to rise, you will incur losses proportional to this growth. The size of your profit or loss will depend, first, on the size of your position, and secondly, on the scale of price movement.
The ability to open long and short positions along with the General leveraged nature of CFD instruments makes working with these contracts one of the most convenient and popular methods of short-term investments on modern OTC markets Forex in Belarus.
Using margin leverage when working with CFDs
Transactions with contracts for difference are made with the participation of borrowed capital. This means that you get the opportunity to influence the market with significantly more funds than you have on your account. As a result, your return on investment increases. If in normal dealing, you need to pay the broker the total value of the asset you want to buy, then with contracts for difference, you need to give it only a part of the total amount, so your capital will be used much more efficiently.
Let us give an example. Let’s say you want to buy 1,000 Microsoft shares at $50 each. This means that the total investment amount should be $50,000, and this does not include commissions and other fees that the broker will charge for opening a transaction.
With the help of CFDs, you will only need to have a certain percentage of the total transaction value on your account to open a position and maintain it for some time. FTM Brokers uses leverage of 10 (or 10%) to operate CFDs on shares, which means that you will only need to deposit $5,000 to open the above position.
If the price of Microsoft shares rises by 10% (up to $55 a piece), you can close the position and get $ 55,000. Of these, 50,000 is the broker’s borrowed funds that you borrowed to open a making investment transactions, and $5,000 is your net profit. Thus, performing CFD investment transactions allows you to get 100% return on investment in just one transaction.
At the same time, it should be remembered that margin leverage increases not only potential profit, but also possible losses, so if prices move against you, you risk losing your starting capital. This fact forces the client to carefully assess the risks, which we will discuss in a separate section of our Academy.
What markets can you work in using CFDs
Our company offers contracts for difference on more than 60 instruments, and all of them involve the use of margin leverage and the ability to open both long and short positions. All tools are divided into categories:
- Foreign currencies;
- Stock indices;
- Precious metals;