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What is a CFD?

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What is a CFD?

CFD is the abbreviation for ‘Contract For Difference’. CFDs are commonly offered on forex, commodities, indices and shares. CFDs are derivatives and thus are classified as complex and risky. The one characteristic that all of these instruments share is that they derive their value from the underlying asset. This means that derivatives traders never actually own the underlying asset – rather, they trade on movements in the price of the asset.

What is CFD on commodities, indices and shares?

A CFD is defined as an agreement to trade the difference in the value of an underlying asset between the time the contract is opened and the market value at the time that it is closed. If the value of the underlying asset goes up, then the buyer generates profit and vice-versa for the seller. If the value goes down, then the buyer incurs a loss and vice-versa for the seller. FXGM offers OTC CFDs that exist as a private contract between FXGM and the trader.

What is Forex?

Forex is a type of CFD. Forex is the abbreviation for ‘foreign exchange’. Forex trading involves the buying and selling of currencies. In a Forex trade, you are buying one currency and selling another currency at the same time or vice-versa. Similar to the buy/sell principle in the traditional markets, the decision to buy or sell in Forex rests on whether a trader believes the currency will weaken (fall) or strengthen (rise).

What is Spread? (Trading conditions)

Spread represents the commission cost that the client pays depending on the size of the order executed.

Spread is directly charged to the client equity at the beginning of the trade and the trade begins at a minus balance equal to the corresponding spread commission amount.

If the client opens a BUY position by clicking on ASK, the trade will be opened at ASK rate but the market rate will be the corresponding BID rate. Likewise, if the client opens a SELL position by clicking on BID, the trade will be opened at BID rate but the market rate will be the corresponding ASK rate.

In order for the trade to be profitable, the spread/commission must first be covered by the market price before a trade begins to produce a profit.

In case the client decides to close a position immediately after opening it, the cost incurred would be equal to the corresponding spread calculation for that position.

A “Trading Simulator” feature is available on the PROfit platform when the client logs in to the trading account.

Example of spread calculation on a currency pair

BUY EURUSD 100,000 BID price 1.2000 ASK price 1.2003 Spread = 0.0003 100000 X 0.0003= $30 USD (spread is calculated on the variable currency of the position, in this case on USD)

Example of spread calculation on a commodity

SELL Crude Oil 1000 barrels BID price 50.00 ASK price 50.06 Spread = 0.06 1000 X 0.06 = $60 USD (spread is calculated on the variable currency of the position, in this case on USD)

Example of spread calculation on cryptocurrencies

BTCUSD price $9,900 9,900 X 5% = 495.00 Spread = $495.00 USD

What is Synthetic Derivatives Split/Reverse Split Price Adjustment

A price adjustment on synthetic derivatives takes place when the value of the Synthetic Derivative reached a pre-defined level of its original value in order to correct its price. For example, for an instrument with a “Synthetic Derivative value at inception” 1000:

  • If the leveraged symbols value reaches a value of 100, a reverse split event is implemented and in the following weekend the price will reset to 1,000.
  • If the leveraged symbols value reaches a value of 10,000, a split event is implemented and in the following weekend the price will reset to 1,000.
  • In order to avoid a difference in your position’s value due to the Reverse split or split of the Synthetic Derivative, a different open price may be implemented by the system to reflect the market fluctuation between the old and new price.  In such a case your account equity will not be affected. Please note that any existing Stop Loss or Take Profit, will not be transferred to the new related positions.

For details on account types and their spreads in value Click here.

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/

 

 

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.