How to work with CFD contracts?
Now that we know the basics, let’s look at the CFD process in more detail. In this lesson, we will explain how the process of opening and closing a making investment transactions takes place using the example of a profitable and unprofitable position.
Let’s say you have an idea that the value of the FTSE 100 index will grow stronger than expected after the publication of the report on the profits of the largest companies in the UK. At FTM Brokers, the FTSE 100 is a tool called the UK100.
You open a long position (purchase) on the UK100 at 6700 with margin leverage of 100.
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Profitable transaction |
Loss transaction |
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Buying FTSE100 at 6700 |
Selling the FTSE 100 at 6700 |
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Position size: 1 lot (10 units) Total: £67,000 (6700*10) Must have on account: £670 |
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The FTSE 100 is growing by 50 points and reaches the level of 6750, where you close the transaction |
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New position size: £67500
Result: you earn £500 (£67500 – £67000) New account balance: £1170 (£670 + £500) Return on investment: about 75% |
New position size: £67500
Result: you earn £500 (£67000 – £67500) New account balance: £170 (£670 – £500) Return on investment: about 75% |
As you can see in this example, when you make a 1-lot deal on an FTSE100 contract, you will receive 10 pounds of profit for each point of price movement in your favour.
The concept of the lot
The volume of your transaction is measured in lots, and the cost of one lot varies depending on the specific market. For example, when working on Forex, 1 lot is 100,000 units of the base foreign currency (dollars, euros, etc.), while 1 lot on US stock market corresponds to 100 shares. Therefore, both the cost of the item and the amount of margin collateral will be different on different instruments. Therefore, we ask you to make sure that you represent the lot size and can evaluate the result of the transaction before opening a making investment transactions.
You can find the full specification of our tools in the investment terminal, as well as on the «Investments» page.
Spread
When you make transactions with contracts for difference, you will always see two available prices in the tool window. One of them is called the offer or sale price (Bid), and the second is the demand or purchase price (Ask). Spread means the difference between these two prices. The lower this value, the lower the final cost of the transaction and the faster your position will start to make a profit. As a rule, the spread size is inversely proportional to the liquidity and popularity of the instrument. The more liquid the instrument – the smaller the spread size. For example, for the most popular pair EUR/USD, the spread may be less than 1 point, while for the much less common pair USD/PLN, the spread is several times greater.