Read Commodities (definitions)
Pepperstone
A contract for difference (CFD) is a vehicle for speculating on the price of financial markets, including forex, equity indices, commodities and shares.
What is a CFD?
More commonly known as derivatives, CFDs provide exposure to a market without the trader actually owning the underlying asset.
CFDs also allow you to express a view on the future direction of a market. Effectively you’re entering into a contract with us to exchange the value between the opening price of an instrument, and where you ultimately chose to close in the future. The distance between your opening and closing price and your position size will determine the degree of profit or loss.
One of the most flexible trading vehicles
CFDs offer you the ability to trade global markets whether they’re rising or falling as you can go long or short. Unlike other financial instruments such as options, there isn’t an expiry date on cash-based CFD trades either.
What is leverage?
When trading CFDs, you’ll be asked to put down a percentage of the full market value of the position, known as its exposure. This means you can achieve a sizeable market exposure with a small initial capital outlay, known as margin or deposit. It’s this idea of leverage, or gearing, that enables traders the opportunity to trade markets they simply wouldn’t otherwise have been able to.
Leverage means a small capital outlay can go further, but this can also result in increased swings in profit and loss within your portfolio. As with all financial products, if the market moves against you, you’ll lose money. But because CFD trading involves leverage, there’s a much greater risk that you could lose substantially more than the capital you invested. Therefore, trading CFDs requires closer attention than unleveraged investments, such as physical shares.
Costs to trade
The cost to trade CFDs with us depends on the account type you choose.
The basic cost is what’s known as the spread, or the difference between the buy and sell price. There can be additional commission charges to consider too so compare accounts to you find the right account for you depending on your trading needs. There’s an interest charge if you hold a position past the rollover point, which takes place a 5pm EST every day and is calculated basis the corresponding swap rate. This can be a consideration for many traders who hold sizeable positions, and they’ll often close out before this time.
Classic character traits of a CFD trader
CFD traders are diverse in their character traits, but our most successful clients are ambitious, passionate about financial markets and continued learning and have likely had experience trading or investing outside of derivatives before taking an interest in CFDs.
Naturally, our clients have a higher risk tolerance and understand that leverage can magnify both profit and loss. A successful trader will have a strong consideration and appreciation for managing risk. They like to trade methodically, either through automated Expert Advisors (or EAs), technical or price action analysis or through more fundamental considerations.
Due to the high levels of leverage, CFD traders tend to hold positions for shorter timeframes, which requires increased oversight of positions and the portfolio.
Risk management
Because CFDs are leveraged products, it’s possible for you to either gain or lose much larger amounts compared to your initial capital outlay, and your losses can exceed your deposits.
For this reason, risk management is a core consideration for all successful CFD traders, and we recommend you watch one of our many webinars on the subject of managing risk to help you harness this discipline. We also offer a range of stop-loss orders that will close your trade at a specific level.
