What is CFD Trading

Difference between BUY and SELL

Buy_and_Sell

Difference between BUY and SELL

Difference between BUY and SELL

CFD Trading - or Contract for Difference Trading, refers to the difference between the level at which you open a trade and the closing point. A contract is created featuring a buy and sell price, based on the conditions of the market. The trader has the choice whether to buy - sometimes called ‘going long’ - or sell - ‘going short’.

Leverage Trading

Leverage_Trading

As CFDs are both derivative and leveraged trading products, you don’t have to own the stock and need only a small percentage of the amount of the trade as a deposit amount. If the markets should move in the direction of your investment you’ll see a profit, while if they shift the other way you’ll see a loss. The amount of money you can lose can be bigger than the amount you originally placed when making the trade.

Hedging with a CFD

Hedging with a CFD

Hedging with a CFD

CFD investors using ETX Capital’s MT4 trading platform are able to hedge their trades, allowing them to potentially limit their losses.

So as an example, let’s assume that we’ve placed a trade on Dollar/Yen, buying the Dollar in the hope that it would strengthen against the Yen. Yet, having placed the trade, we suspect that we may have made a mistake - not sufficiently for us to want to close the trade, but just enough for us to have a lingering doubt.

In any other form of trading, our only choices would be to either immediately close the trade, or keep it open and hope for the best. With a CFD we can counteract our original trade by opening another Dollar/Yen position and sell the Dollar.

So this means that if our currency pair moves in the opposite way to our opening trade - the Dollar falling against the Yen - the hedge will take effect.

CFDs and Spread Betting

CFDs and Spread Betting

CFDs and Spread Betting

While CFD Trading is the most common type of derivatives trading across the world, Spread Betting is far more popular in the UK.

In truth there are a great many similarities between CFDs and Spread Betting. Both allow use of leverage and margins, the ability to take a position on either the rise or fall of an asset, and the security of stop losses and limits. They are also both subject to overnight trading charges and it is possible in both forms of trading to lose more than you initially deposit.

The main difference is that profits obtained from Spread Betting are exempt from taxation in the UK, while CFD profits are not – however, CFD losses can be offset against profits for tax deduction. Another difference is that CFD trades are charged commission fees, while fees are factored into the spreads in Spread Betting.

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