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What is a CFD?

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

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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