Mohammed A. from Dubai, UAE: I am interested in trading CFD’s but I’m actually a novice. Can you please give me just a short explanation on how to trade CFD’s? Thank you.
Hi Mohammed and CompariZone readers. A contract for difference (CFD) is a popular form of derivative trading which allows you to speculate on the price movements of global financial markets without the need to buy or sell the underlying instrument directly.
Similar to traditional dealing, the price of a CFD is quoted as either a Buy or a Sell. The CFD price replicates the price of the underlying instrument and with some brokerages, you may be charged with a small commission for every equity trade that was placed.
For example, you’re interested in trading Alibaba share CFDs (BABA). In this scenario, we have the stock with a selling price of 111.69 and a buying price of 111.72. So let’s say you believe that the company’s shares will go up in a few days and decided to buy 100 CFDs of Alibaba based on the buy price of 111.72.
In this scenario, Alibaba’s shares went up after a few days and to cash in your profit, you need to close your CFD trade. Let’s say the that the current stock has a selling price of 113.50 and a buying price of 113.59 and you closed your CFD position by selling 100 CFDs at 113.50.
Take note that a CFD is an agreement between your and your broker to that you will pay each other the difference between the price of an asset at the moment that the contract has been created and the price when the same contract has been terminated or closed. The difference in these prices can result in either a profit or a loss.
In our example, Alibaba’s shares moved 1.78 in the direction you speculated so the closing value will be $11,350 (100 x 113.50) and this is higher than your opening value which is at $11,172 (100 x 111.72). The result of this trade is a profit of $178 ($11,350 – $11,172) before commission.
So what if your speculation was wrong and the market moved against you? Let’s say Alibaba’s shares went down after a few days with a selling price of 109.10 and a buying price of 109.18. When you close your position, you will be selling 100 CFDs at 109.10.
In this scenario, Alibaba’s shares moved 2.62 against the direction that you speculated so the closing value will then be $10,910 (100 x 109.10) and this is lower than your opening value which is at $11,172 (100 x 111.72). The result of this trade is a loss of $262 ($11,172 – $10,910) before commission.
Now that you know how to trade CFDs, your next move is to find a brokerage and we highly recommend that you register with a reliable and trusted company like 24option. You may click here to access their website.