You can close a CFD transaction at any time (given the market is open). Then, you will either make a profit if the value of the CFD moved in your favor, or you’ll take a loss if it moved against your bet. While holding the position open, you’ll see how well your CFD bet is doing in real time.
Trading CFDs incurs various transaction costs. There is a commission you pay to the broker, spread which is a difference between buying (ask price) and selling (bid price), account management fees (if any), as well as overnight financing charge.
CFD overnight financing charge is paid by buyer (long position), while the seller (short position) gets paid interest. (However, at some brokers the short position will incur a fee, usually a smaller one than for long buyers.)
Another factor when selecting an online CFD broker is checking for the trading tools and research provided as well as ability to trade via smartphones and tablets.
CFD Transaction Example
Let’s say you want to buy 100 shares of Stock A and it is $10 a share, so it will cost you $1,000. However, by entering a CFD contract for those 100 shares, you pay only a fraction of the value, let’s say, $200. You don’t own the shares but have a contract where the changes in underlying stock will affect your CFD contract’s value. So, if a stock doubles to $20, you’ll make $1,000, whether you own 100 shares or a CFD contract on them. However, with CFD contract you’ll make $1,000 on a $200 investment rather than on a $1,000 investment. So, your returns are multiplied. On the other hand if a trade goes against you, your losses will be multiplied with CFDs. Therefore, CFD contracts are more risky.
Before selecting an online CFD broker, check the following:
Always keep risk in mind and consider protecting your capital with stop orders.
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CFDs are leveraged products, thus are considered to be risky bets
Contracts for Difference (CFDs) allow investors to use leverage when making bets on prices of stocks, indices, commodities, and forex.
CFDs are financial derivatives, meaning their value is based on price action of underlying instruments. CFD trading isn’t allowed in the United States, but traders in the United Kingdom, Canada, Australia, New Zealand, Hong Kong, Japan, Israel, South Africa, and a number of European countries can open online CFD accounts and trade. Quite often brokers who offer CFD trading also provide spread betting as an alternative.
In a CFD transaction, there is a buyer (long position) and a seller (short position). Since the contract is leveraged, traders need to put up a small amount (margin) of whole contract’s value, and that can range from under 1% to 10% or more.
Margin required will differ depending on the instrument traded (whether it is stock, FX pair, or something else). Also, in times of volatility, margin requirements rise.
When trading stock CFDs, the margin will also differ depending on the size of the company (whether large cap or small one) as well as a number of other factors, including broker’s policy.
There is additionally a maintenance margin, basically telling you how much can your trade decline before you receive a call from your CFD broker to deposit more money or close you position in a CFD.
Consequently, you need to check what are the margin requirements at the online CFD house where you’re looking to open a trading account. In addition, check the contract sizes offered as these differ among brokers.