CFD trading With Royal Broker
What is CFD trading and how does it work?
What this means is that you select the market you want to trade but rather than making the full physical purchase (or sale) you open a CFD with us instead.
This contract will replicate the profit and loss of your intended purchase (or sale).
CFDs are fast growing in popularity as a flexible alternative to traditional share trading, giving you a greater degree of leverage on your investment capital.
What is CFD trading?
CFD trading is quite similar to forex trading. When trading on the platform, you select the instrument you wish to trade and enter your order. Just like in other trades, if you think the price of a certain instrument, e.g. crude oil, will increase, you’ll want to buy the crude oil CFD. The same goes the other way – if you predict the value will go down you sell the CFD.
Naturally, like any type of trade or investment, wrong predictions can lead to loss of money, and one should be aware of the risks involved in CFD trading.
What are CFDs?
CFD stands for Contract For Difference. This type of financial instrument allows you trade an underlying index, share or commodity contract without actually having to own it. The CFD price is the price of the underlying asset. So if the price of the underlying asset goes up, so will the price of the CFD. Similarly, if the price of the underlying asset goes down, so will the price of the CFD. It is important to us to emphasize that you don’t own the asset you trade. FXVIP was one of the first online brokers to offer CFD trading, giving individual traders access to a large range of markets which were not accessible to them before.
Short and long CFD trading explained
CFD trading enables you to speculate on price movements in either direction. So while you can mimic a traditional trade that profits as a market rises in price, you can also open a CFD position that will profit as the underlying market decreases in price. This is referred to as selling or ‘going short’, as opposed to buying or ‘going long’.
If you think Apple shares are going to fall in price, for example, you could sell a share CFD on the company. You’ll still exchange the difference in price between when your position is opened and when it is closed, but will earn a profit if the shares drop in price and a loss if they increase in price.
With both long and short trades, profits and losses will be realised once the position is closed.
Leverage in CFD trading explained
CFD trading is leveraged, which means you can gain exposure to a large position without having to commit the full cost at the outset. Say you wanted to open a position equivalent to 500 Apple shares. With a standard trade, that would mean paying the full cost of the shares upfront. With a contract for difference, on the other hand, you might only have to put up 5% of the cost.
While leverage enables you to spread your capital further, it is important to keep in mind that your profit or loss will still be calculated on the full size of your position. In our example, that would be the difference in the price of 500 Apple shares from the point you opened the trade to the point you closed it. That means both profits and losses can be hugely magnified compared to your outlay, and that losses can exceed deposits. For this reason, it is important to pay attention to the leverage ratio and make sure that you are trading within your means.
Leveraged trading is sometimes referred to as ‘trading on margin’ because the funds required to open and maintain a position – the ‘margin’ – represent only a fraction of its total size.
When trading CFDs, there are two types of margin. A deposit margin is required to open a position, while a maintenance margin may be required if your trade gets close to incurring losses that the deposit margin – and any additional funds in your account – will not cover. If this happens, you may get a margin call from your provider asking you to top up the funds in your account. If you don’t add sufficient funds, the position may be closed and any losses incurred will be realised.
Hedging with CFDs explained
CFDs can also be used to hedge against losses in an existing portfolio.
For example, if you believed that some ABC Limited shares in your portfolio could suffer a short-term dip in value as a result of a disappointing earnings report, you could offset some of the potential loss by going short on the market through a CFD trade. If you did decide to hedge your risk in this way, any drop in the value of the ABC Limited shares in your portfolio would be offset by a gain in your short CFD trade.
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