WHAT ARE CFDs
Contracts For Difference (popularly referred to as CFDs) are specialized and popular “Over The Counter” (OTC) financial derivative products that enable you to trade on the price movement of financial assets which include Indices Futures, Commodity Futures, Cryptocurrency, Shares and, Exchange Traded Funds.
They enable clients to trade freely without actually owning the underlying asset or acquiring any rights or obligations in relation to the underlying asset.
WHY TRADE CFDs
The main benefit of trading CFDs is the flexibility to trade against the price movements without actually buying or selling the physical instrument.
7B’s CFDs derive their price from the underlying asset.
You can trade CFDs if you believe the price of a financial instrument is likely to go up in value (strengthen) and if you think it is likely to go down (weaken).
Your profit or loss in online CFD trading is determined by the difference between the price you buy at and the price at which you sell.
For every point the price of the instrument moves in your favour, you gain multiples of the number of CFD units you have bought or sold. For every point the price moves against you, you will make a loss.
Start trading CFDs with a regulated broker at 7B today!
CFD TRADING METHODS
There are various trading strategies that are often used when trading CFDs, that even the most unskilled trader can understand. These decisions involve a number of trading methods and the most popular are the Long vs. Short positions.
A long position in trading CFDs is when a trader purchases the asset. This will mean that the asset will rise or see an increase in its value over the time of life of the contract. In long term trading, as it has a higher level of forecasting ability will allow traders to act on lower price market moves. Trades normally last from month to more than a year.
The short position occurs when the trader feels there will be a decline in the assets value and a ‘sell’ is selected, however there is an intention from the trader to buy the contract back at a later stage. E.g.: A short seller’s expectation is that the price of the asset will fall over the life of the contract. If his prediction is wrong and the price of the asset starts to rise the open trade will sustain a loss, which is calculated by the difference between the opening and closing price of that asset over that time. The reverse is true should his open trade indicate that the asset chosen would decrease in value. Short term trades can allow profits from short time spans even up to minute-to-minute moves. Limiting financial costs is an advantage in short term trading.
What is margin and leverage?
CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade in order to open a position. This is called ‘trading on margin’ (or margin requirement). While trading on margin allows you to magnify your returns, your losses will also be magnified as they are based on the full value of the CFD position.
What are the costs involved in CFD trading?
Spread: When trading CFDs you must pay the spread, which is the difference between the buy and sell price. You enter a buy trade using the buy price quoted and exit using the sell price. The narrower the spread, the less the price needs to move in your favour before you start to make a profit, or if the price moves against you, a loss. We offer consistently competitive spreads.
Holding costs: at the end of each trading day (at 5pm New York time – which is 10pm Nigerian time), any positions open in your account may be subject to a charge called a 'holding cost'. The holding cost can be positive or negative depending on the direction of your position and the applicable holding rate.
Market data fees: to trade or view our price data for share CFDs, you must activate the relevant market data subscription for which a fee will be charged. View our market data fees
Commission (only applicable for shares): you must also pay a separate commission charge when you trade share CFDs. Commission on UK-based shares on our CFD platform starts from ###% of the full exposure of the position, and there is a minimum commission charge of $#. View the examples below to see how to calculate commissions on share CFDs.
Example of a CFD trade
Buying a company share in a rising market (going long)
In this example, UK Company ABC is trading at 98 / 100 (where 98cents is the sell price and 100cents is the buy price). The spread is 2.
You think the company’s price is going to go up so you decide to open a long position by buying 10,000 CFDs, or ‘units’ at 100 cents. A separate commission charge of $10 would be applied when you open the trade, as 0.10% of the trade size is $10 (10,000 units x 100p = $10,000 x 0.10%).
Company ABC has a margin rate of 3%, which means you only have to deposit 3% of the total value of the trade as position margin. Therefore, in this example your position margin will be $300 (10,000 units x 100p = $10,000 x 3%).
Remember that if the price moves against you, it’s possible to lose more than your margin of $300, as losses will be based on the full value of the position.
Outcome A: a profitable trade
Let's assume your prediction was correct and the price rises over the next week to 110 / 112. You decide to close your buy trade by selling at 110 cents (the current sell price). Remember, commission is charged when you exit a trade too, so a charge of $11 would be applied when you close the trade, as 0.10% of the trade size is $11 (10,000 units x 110p = $11,000 x 0.10%).
The price has moved 10 cents in your favour, from 100 cents (the initial buy price or opening price) to 110 cents (the current sell price or closing price). Multiply this by the number of units you bought (10,000) to calculate your profit of $1000, then subtract the total commission charge ($10 at entry + $11 at exit = $21) which results in a total profit of $979
Outcome B: a losing trade
Unfortunately, your prediction was wrong and the price of Company ABC drops over the next week to 93 / 95. You think the price is likely to continue dropping so, to limit your losses, you decide to sell at 93 cents (the current sell price) to close the trade. As commission is charged when you exit a trade too, a charge of $9.30 would apply, as 0.10% of the trade size is $9.30 (10,000 units x 93cents = $9,300 x 0.10%).
The price has moved 7 cents against you, from 100 cents (the initial buy price) to 93 cents (the current sell price). Multiply this by the number of units you bought (10,000) to calculate your loss of $700, plus the total commission charge ($10 at entry + $9.30 at exit = $19.30) which results in a total loss of $719.30.
What are the Advantages of CFDs?
No Exchange fees – You do not own the underlying asset and do not acquire any rights or obligations in relation to the underlying asset. It is a contract between the client and 7B.
Leverage trading – You need significantly less capital to open a trade in comparison to owning the underlying asset. Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains.
No Stamp Duty – For many, CFDs are not subject to stamp duty (this is subject to your individual circumstances and jurisdiction and can change).
Multi-vehicle Investment – The ability to trade a range of instruments from the same trading platform.
Trade on both rising and falling markets – Open either short or long positions according to the market conditions and your trading strategy.
CFDs don’t expire – The general idea is that where there is a rise generally is followed by a fall it is a continuous market cycle.
Hedging potential – A buffer for your trades if the trade is not going in the intended direction you can open the equivalent position in the opposite direction.
7B is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by 7B or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.