FXGM allows its clients to perform transactions via a financial product that is called Contract for Difference (CFD).
A Contract for Difference (CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (If the difference is negative, then the buyer pays instead to the seller).
CFDs, with FXGM, allow you to trade on the price value of Forex, shares, commodities and indices. Trading on the value of a financial instrument without the need for ownership.
Trading CFDs is risky, and it is highly recommended to obtain familiarity and experience before you start trading. In case you do not have any familiarity or experience, trading CFDs may not be appropriate for you. For the full risk disclaimer, please click on the link below. https://fxgm.com/About-Us/Risk-Disclaimer
Examples in Trading CFDs
- If an investor buys shares of a listed company, he will have an ownership in that company and if the price of the share increases, he will earn the difference between the buying price and the selling price, for any share he holds. If the share price decreases, he will lose the difference between the buying and the selling price for any share he holds.
- If an investor trades by buying ounces of gold he will have the physical gold metal, and if the price of the gold increases, he will earn the difference between the buying price and the selling price for every ounce of gold he had purchased. If the gold price decreases, he will lose the difference between the buying price and the selling price for every gold ounce he has.
By trading CFDs the investor holds a contract on the price value of the financial instrument without owning the actual share or the gold ounce. However, the principle for earning and losing is the same. The abovementioned examples were on shares and gold, however, this is valid for any financial instrument that is being traded via CFD.
For the full list of symbols of the financial instruments and the trading conditions with FXGM including the order size and information about related costs and charges, click on the following link: https://fxgm.com/financial-products/trading-conditions
Example in trading with CFDs using numbers:
An investor wishes to buy 10 ounces of gold; he believes that the gold price will increase. The current buying price is $1,200 per ounce, at the gold shop. The investor will have to actually buy the gold and pay 10 ounces times $1,200 per ounce, which equals to a total amount of $12,000. He exchanges the money with the gold. This investor can go back to the shop and sell the 10 ounces anytime, with the aim of selling it after the price exceeds $1,200 in order to earn a profit.
Assuming that the price increases by $50 and reaches $1,250 per ounce, the investor can sell the 10 ounces of gold and earn $50 per ounce, which would give him a total profit of $500 ($50 increase per ounce times 10 ounces). Assuming on the other hand, that the price decreased by $50 and reached $1,150 per ounce, the investor can sell the 10 ounces of gold and lose $50 per ounce, with a total loss of $500 ($50 decrease per ounce times 10 ounces).
CFDs with an expiry date
As explained a CFD is traded on the price value of other financial instruments. In case the other financial instrument has an expiry date then, the CFD will have the same expiry date. You can find all CFDs that have an expiry date by clicking on the following link https://fxgm.com/financial-products/trading-conditions/. The spreads provided are indicative and are subject to change according to trading hours and market volatility. Clients should note that these may vary and are advised to check important news announcements on economic calendar which may result in the widening of spreads, among other instances.
Crude Oil (CL) is being traded as a future contract in the NYME (New York Mercantile Exchange) owned by the CME (Chicago Mercantile Exchange), with future contracts having an expiry date and indicating that the contract will be closed at the end of the indicated date. The CFD that follow the Crude Oil (CL) contract will have the same expiry date and will no longer be tradeable. Any open positions will be closed at the expiry date of the contract. Investors that wish to have a Crude Oil (CL) CFD after the expiry date, will need to get into a new CFD contract that follows the new future contract with a new expiry date.
The expiry date can be found in the name of the CFD symbol.
An investor funding his trading account and wishes to buy 100 ounces of gold at the market price, the trading platform allows him a leverage of 1:200 on gold trading. The investor, opens the trading box available on the trading platform and establishes the requested contract details: 100 ounces of gold. The trading platform calculates what is the minimum margin to open the trade.
Trade value/exposure = 100 ounces * buying price $1,203.38 = $120,338
The margin with 1:200 leverage (0.5%) = total exposure $120,338/200 = $601
The investor has $1,000 so, he has more than the minimum required and therefore, the investor can open the trade.
Another example would be, if an investor has $500 in his trading account and his broker allows him a leverage of 1:200, the investor can have a maximum exposure of $500*200 = $100.000, ($500 is equal to 0.5% out of $100.000).
If the gold price increases by 0.5%, the investor will gain $601 ($120,338 *0.5%); the investors’ equity will be $1,601 ($1000 the deposit + 601 the profit) => a Gain of 60% from the deposit.
If the gold price decreases by 0.5%, the investor will lose $601 ($120,338 *0.5%); the investors’ equity will be $399 ($1000 the deposit - 601 the loss) => a Loss of 60% of the deposit.
An investor purchases 100 ounces of gold and the price per ounce is $1,203.38, giving a total exposure of $120,338. If the gold price changes by 0.85% in 30 minutes, the investor is at work and this quick move went against the investor, this will result in a loss of $120,338*0.85% = $1,022.87.