What are Margins in CFD trading CFD margins explained

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How to Trade CFDs

Find out more about Contract for Difference (CFD) trading with City Index.

How to place a CFD trade

With the ability to trade on falling markets, use leverage and access thousands of instruments, some trading 24 hours a day, investors are taking advantage of the versatility of CFDs as part of their portfolio.

CFD trading steps

  • Choose a market
    Decide which market you want to trade on. You can get trading inspiration through our fundamental and technical analysis research portal
  • Decide to buy or sell
    Click ‘buy’ if you think the price will increase in value or ‘sell’ if you think the market will fall in value
  • Select your trade size
    Choose how many CFDs you want to trade. 1 CFD is the equivalent of 1 physical share in equity trades
  • Add a stop loss
    A stop loss is an order to close your position out at a certain price if it moves too far against you
  • Monitor and close your trade
    Once you have placed your trade, you will see your profit/loss update in real time at the top of the screen. You can exit your trade by clicking the close trade button

CFD trading explained

Choosing a market

At City Index, we offer CFDs on thousands of individual markets including shares, indices, currencies, commodities, interest rates and bonds, allowing you instant exposure to major global markets including the UK, US, Europe, Asia, Australia and New Zealand.

With so much choice, it is important to find a trading opportunity that suits you. You can use the research tools provided on the trading platform to help you identify trading opportunities that match your trading style.

Use the search function on the platform or app to search and select your market. Learn more about our research tools here.

Decide to buy (go long) or sell (go short)

Once you have chosen a market, you need to know the current price. You can do this this by bringing up a trading ticket in the platform.

CFD markets have two prices. The first price quoted, is the sell price (the bid), and the second price is the buy price (the offer). The difference between the two is known as the spread. The price of your CFD is based on the price of the underlying instrument.

If you believe a market price will go up, you buy that market (known as going long). If you believe it will fall, you sell the market (going short).

Select your trade size

With CFD trading you select the number of CFDs you wish to trade.

With equity trades, 1 CFD is equivalent to 1 share. When trading indices, FX, commodities, bonds or interest rates, the value of 1 CFD varies depending on the instrument. You can see which number you are trading on by looking up the ‘tick value’ in the instrument’s market information sheets. CFDs are traded in the base currency of the market.

CFD trading is a leveraged product which means you only need to have a small percentage of the overall trade value, known as margin, in your account in order to open the trade. Generally speaking, the larger the value of your trade, the more margin required. It is important that you have sufficient funds in the account to place the trade. The margin calculator in the trading platform will automatically calculate your initial margin for you.

Add stop and limit orders

Before you place your trade, it’s important to consider your risk management strategy.

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A key risk management technique is to place an order such as a stop loss that will automatically close the trade if the market reaches a certain level.

A stop loss order is an instruction that allows the platform to close your open position once it reaches a specific level set by you. This will, as the name suggests, be at a price below the current market level and be triggered on losing trades to help minimise losses.

A limit order is an instruction to close out a trade at a price that is better than the current market level and is used to help lock in profit targets.

Standard stop losses and limit orders are free to place and can be placed in the dealing ticket when you first place your trade or once your trade is open.

Monitor your trade

Having placed your trade and any stops or limits, your profit and loss of your CFD trade will now fluctuate with each move in the market price.

You can track market prices, see your profit/loss update in real time and add new trades or close existing trades from your computer or by using our trading app on your smartphone or tablet.

Closing your trade

Once you are ready to close your trade, you need to do the opposite trade to the opening trade or select the ‘close position’ option within the positions window.

By closing the trade, your net open profit and loss will be realised and immediately reflected in your account cash balance.

This will be done for you if your stop loss or limit order has not been triggered.

CFD examples

Review the CFD trading examples to see how CFD trading works in practice.

Trade CFDs on over 5,000 markets

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Trading with us

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% 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.

△ Based on CFD spreads and financing competitor comparison on 28/08/2020.

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Introduction to CFDs

CFDs for beginners

This is the first in a two part explanation on the basics of CFDs and how they can be traded. To ensure your understanding of terms used in this page, please refer to the Glossary.

Risk management will play a major role in any successful trading plan. If you use a trading method that allowed you to be successful the majority of the time you would assume that you would be profitable right? What would happen if your average losses were 60% bigger than your average wins?

Despite the fact that more of your trades are profitable, the fact that your losses are larger would result in your account going backwards especially when you factor in transaction costs. This illustrates that the key to trading success lies not in achieving a greater number of profitable trades but in intelligent position sizing, management of your trading capital and risk management. Careful consideration given to these factors can ensure you are not over exposed to the market and that any losses incurred are kept relatively small.

As a side note, you should recognise as early as possible that losing trades are an inevitable part of trading. As a trader we always aspire to increase the number of profitable trades and minimise the number of losing trades but the truth unfortunately is that there are too many factors influencing share prices at any given point to predict the outcome of a trade with any real certainty. Rather than focusing on a futile aspiration of trying to maximise profitable trades it is advisable to instead focus on perfecting the things that you have a very high degree of control over. This, in simple terms, means controlling your risk.

Risk management plays such a crucial role in trading success because it allows you to protect your capital. It is essential that you know your stop-loss levels prior to entering a trade. It is best to know your exit price in advance for a number of reasons. Firstly, it is a critical element in the position sizing methodology discussed previously. Secondly predetermining your exit level allows you to make a decision when you have no capital at risk. You may have found in the past that it can be very difficult to make a trading decision whilst you have a position open. This is because decisions can be influenced by your emotions. Instead of this, if you predetermine your exit level and ensure you exit at your predetermined price you should find the whole trading experience much less stressful.

In order for this model to work we need to know three things; our entry price, our exit price and our available capital.

A CFD is an agreement between two parties to exchange the price difference of a financial instrument. The profit and loss of a trade is determined by the difference in the entry and exit price of the underlying instrument from when the contract is opened and closed.

CFDs are a leveraged product, which allow the buyer or seller to gain full market exposure while only outlaying part of the full notional value of the instrument.

CFDs therefore offer the potential to make a higher return from a smaller initial outlay compared to investing directly in the underlying security.

Leverage usually involves more risks than a direct investment in the underlying instrument. It is important you understand that leverage has the potential to work against as well as for you as using leverage magnifies your trading profits and losses.

A full list of CFDs offered by FP Markets is available here.

CFDs have been used by professional investors for over twenty years and emerged first in the over-the counter (OTC) or equity SWAP market. Equity swaps were used by institutions to cost effectively hedge their equity exposure.

CFDs have become one of the most popular derivative products in the Australian and European financial markets.

The popularity of CFDs has been driven by:

CFDs provide all the benefits of share trading combined with added advantage of being able to utilise your unrealised profit, and only outlay part of the full notional value of your position.

To gain a thorough understanding of the mechanics of CFDs it is important for you to become familiar with the key features of the product.

CFDs are traded on margin and there are two different forms of margin that may be payable when trading CFDs – Initial and Variation Margin.

An Initial Margin is a deposit used as collateral to open a CFD position. The margin is held to ensure you can meet your obligations. A margin rate is expressed as a percentage and is calculated based on the liquidity and volatility of the underlying security. Margin rates typically range between 3% – 100%. The margin requirement of a CFD position is calculated using the “mark to market” concept. This means that the current value of your position is assessed during each trading day. The margin required is adjusted to reflect the current market value of the position as the price of the underlying security fluctuates. Additional margin amounts will be payable should you fail to maintain the required margin on your position.

Calculating your initial margin

Quantity x Price = Full Notional Value
1000 x $10 = $10,000
Full Notional Value x Margin Percentage = Margin Required
$10,000 x 5% = $500
Your Initial Margin is $500.

In addition to the Initial Margin required to open to hold a CFD position, you may also be required to pay an additional margin incurred by an adverse price movement in the market, this is known as Variation Margin. The Variation Margin is based on the intraday marked to market revaluation of a CFD position.

For example, if you have a long position and the price falls then you are required to pay a Variation Margin. The Variation Margin is a percentage of the total position size and the amount required will cover the adverse movement in the value of your position.

On the other hand, if you have a short position and the price falls, you would receive a Variation Margin equal to the positive movement in the value of the position.

Failure to pay a Variation Margin call can lead to the position being compulsorily closed out. You as the position holder are obliged to pay for any shortfall in funds if Variation and Initial Margins are insufficient to cover the shortfall.

Payment of margins

Margins are calculated on an intraday basis to ensure an adequate level of margin cover is maintained. This means that you may be obliged to pay more if the market moves against you. If the market moves in your favour, your margin requirement may be reduced.

Margin payments are usually required within 24 hours of being advised; in some circumstances margin call payments may be required on shorter notice. If you do not pay in time, your CFD provider can take action to close out your positions without further reference to you.

FINANCING

Financing is the daily cost incurred for holding an open position overnight. The financing rate is applied to the full value of your position and paid or received daily on long and short positions. If you hold a long ‘buy’ position you will be required to pay a financing charge, if you hold a short ‘sel’ position you will receive financing income.

Financing rates are calculated by your CFD provider by adding or subtracting a margin percentage from the RBAIOCR (Reserve Bank of Australia Interbank Overnight Cash Rate) and dividing the resulting amount by 365, representing the number of days in a year. The resulting percentage is then multiplied by the full notional value of the position to give you a daily financing rate.

Calculating The Financing Rate

RBAIOCR + Margin (long position) / number of days in year = Daily rate
(4.5% + 2%) / 365 = 0.0178%

Full Notional Value x Daily Rate = Daily Financing Payable
$10,000 x 0.0178% = $1.78

Your nightly financing rate is $1.78.

In the case of a short position you would receive the financing rate. In the calculation above you would simply subtract the margin from the RBAIOCR rate.

CFD commission is calculated based on the full notional value of the position with a minimum charge. Commission rates will vary between CFD providers.

CALCULATING YOUR COMMISSION

Full Notional Value x Commission rate = Commission charged
$10,000 x 0.10% = $10

Your commission charge would be $10.

Leverage or gearing is like borrowing, it allows you to increase your potential return on a trade as you are able to increase your exposure whilst only contributing a fraction of the total value of the position.

Products such as shares are not leveraged and have a leverage ratio of 1:1. CFDs can have leverage ratio of up to 33:1 meaning that every $1 invested has the effect of multiplying the profit or loss by 33.

You deposit $10,000 in your CFD account and hold five CFD positions that are each worth $10,000 (your total exposure is equal to $50,000), you have leveraged your initial capital by five times (or 5:1) leverage.

In the above example your maximum loss could be $40,000 in addition to your $10,000 initial deposit, however this would only occur should all of your five CFD positions fall to a zero value, this is highly unlikely but it illustrates the potential downside of using aggressive leverage.

To further illustrate the potential dangers of leveraging too aggressively we will look at another example which is something of a worst case scenario. If you decided to open the largest position possible using your available capital, assuming you are trading a share CFD with a 5% margin rate you could potentially open a $200,000 position. In this case it would take only a negative price movement of 5% in the underlying share price to completely eliminate all of your trading capital. A movement of 5% is well within the realms of possibility and could happen on a single trading day.

This example highlights that the higher your leverage ratio the more susceptible you are to adverse price movements. This example also highlights that employing a high leverage ratio means that all or the majority of your capital is tied up in maintaining your margin.

A small negative price movement will require the payment of additional margin, and you will need to deposit additional funds to cover the additional margin requirement. This is known as a ‘margin call’ and happens when you have no free equity in your trading account.

The leverage ratio you use should depend on your experience. If your initial trading capital of $10,000 grew to $20,000 then the same 3:1 leverage ratio would allow you to gain exposure to the value of $60,000 rather than the original limit of $30,000. Successful trading and capital growth will allow you to increase your market exposure while employing conservative leverage levels. Experienced traders who watch the market closely can use higher levels of leverage.

If you have additional trading reserves readily available, higher leverage ratios could be employed. You may have $30,000 allocated for trading in a separate account but hold only $10,000 in your trading account. You could consider leveraging the total $40,000 capital at 3:1 allowing you to gain market exposure of $120,000. If you employ this strategy it is important to monitor your CFD account closely to ensure you do not fall into margin call due to lack of free equity in your CFD account.

Trading CFDs requires you to monitor three important values to assess the balance of your account, the deposit required to maintain your positions and the trading resources to take new positions. These values are referred to as Gross Liquidation Value (GLV), Initial Margin (IM) and Free Equity (FE). Your GLV and FE will decrease if your CFD position(s) move against you. A margin call occurs when your GLV falls below your Initial Margin or the amount you have in the account. Should this occur you must either close one or more of your open positions to reduce your initial margin requirement or deposit additional funds to fund your account.

Relatively inexperienced CFD traders should use a leverage ratio of 3:1. This level will allow you to gain additional market exposure whilst limiting the effects of any adverse market movements. The table on the opposite page illustrates how your maximum exposure amount changes as your equity fluctuates. The Gross Liquidation Value (GLV) is the total value of your account, irrespective of margin requirements. GLV is sometimes referred to as your Total Equity. This is the amount of capital in your account if you were to have no positions.

GROSS LIQUIDATION VALUE (GLV) LEVERAGE FACTOR CHOSEN MAXIMUM EXPOSURE
$3,000 3 $9,0000
$4,000 3 $12,000
$5,000 3 $15,000
$5,500 3 $16,500
$6,000 3 $18,000
$8,000 3 $24,000

The table below illustrates the impact of a 30% adverse price movement to the share price of each CFD position on your account. The unrealised loss on the positions is $4,500 which has reduced the value of the account value of the account to $500 GLV.

MARGIN CALL EXAMPLE

In this example we assumed you started with $5,000 capital in your account and you have three open CFD positions which have different margin requirements.

Currently the total margin requirement is $1,000 therefore the trader has $4,000 of Free Equity available to purchase CFDs. If we look at the total exposure in the market it is actually $15,000.

CFD (GLV) SHARE CFD PRICE NUMBER OF CFD HELD MARGIN REQUIRED MARGIN USED EXPOSURE
ABC $25.00 200 5% $250 $5,000
$XYZ $10.00 500 $5% $250 $5,000
SST $5.00 1000 10% $500 $5,000
TOTAL $1,000 $15,000
GLV $5,000
INITIAL MARGIN $1,000
GLV $4,000

The table below illustrates the impact of a 30% adverse price movement to the share price of each CFD position on your account. The unrealised loss on the positions is $4,500 which has reduced the value of the account value of the account to $500 GLV.

CFD (GLV) SHARE CFD PRICE NUMBER OF CFD HELD MARGIN REQUIRED MARGIN USED EXPOSURE
ABC $17.50 200 5% $175 $3,500
$XYZ $7.00 500 5% $175 $3,500
SST $3.50 1000 10% $350 $3,500
TOTAL $700 $10,500
GLV $500
INITIAL MARGIN $700
GLV $(200)

As shown in the previous table the account has fallen in to a Margin call since the Initial Margin is $200 greater than the GLV or funds in the account. As soon as this occurs you would receive a request to top up your account immediately, or be at risk of part or full closure of your positions.

Going long and making a profit

‘Going long’ is simply buying a CFD position to profit from a share price increase.

The difference between the entry price and the exit price is the profit or loss that is made on the trade. The example below compares the Return on Investment (ROI) on identical CFD and share trades. This comparison illustrates the similarities between CFDs and shares while highlighting the fact that CFDs have the ability to greatly increase ROI.

Amy and Steve purchase 500 BHP Billiton shares, the shares are currently trading at $35 a traditional share position would require an outlay of $17,500. BHP CFDs have a margin rate of 5%, the margin required to open the position is $875. Steve opens a $17,500 share position and Amy opens a $17,500 CFD position. Both traders are charged 0.10% commission.

The table below illustrates the outcome for both Amy and Steve if the underlying price of BHP rose to $36.00 the following day.

CFDS SHARES
DAYHONE AMY STEVE
OPEHING PURCHASE PRICE $35 $35
BUYHQUANTITY 500 500
COMHISSION PAID 0.10% $17.50 0.10% $17.50
GSTH $0 $1.75
TOTHL EXPOSURE $17,500 $17,500
CFDHMARGIN – 5% 5% $875
INIHIAL OUTLAY $892.50 $17,519.25

Going short and making a profit

‘Going short’ is simply opening a short ‘sell’ CFD position to profit from a share price decline.

Amy believes Qantas Airlines (QAN) will release lower than expected profit figures and she expects the share price to drop in response. Amy places a sell order for 10,000 QAN shares at the current market price of $2.50. The margin rate on QAN is 5% so $1,250 is required as margin to open the position. The trade is placed and Amy holds a short QAN CFD position.

When opening a short position you have received a cash payment for the full value of your short position and receive interest on this amount at the RBA rate minus 2% pa. The overnight interest rate is calculated by dividing the per annum applicable interest rate payable by 365 (days per year).

The table below demonstrates the outcome of the trade assuming that the price of QAN falls by 10 cents to $2.40 the following day.

Please note we have not compared this trade to an identical equity trade due to the limitations with short selling physical shares.

OPENING SHORT QANTAS POSITION
PRICE $2.50
CFDS SOLD FOR $25,000 EXPOSURE 10,000
TOTAL EXPOSURE $25,000
COMMISSION (0.10%) $25
MARGIN REQUIREMENT $1,250
INITIAL OUTLAY $1,275
CLOSING SHORT QANTAS POSITION
PRICE $2.40
CFDS BOUGHT TO CLOSE POSITION 10,000
POSITION SIZED CLOSED $24,000
COMMISSION $24
TOTAL OUTLAY $1,324
FINANCING RECEIVED AT 2.5% PA BASED ON RBA RATE OF 4.5% [($2.45 X 10,000) X (RBA – 2%)]/ 365 $1.68*
GROSS PROFIT $1,000
NET PROFIT (GROSS MINUS TRADING COST + FINANCIAL RECEIVED) $952.68
RETURN ON OUTLAY EXCLUDING COST OF TRADE 71.95%

Scalping

Scalping is a trading style that is particularly suited to CFDs due to the greater flexibility and lower transaction costs of CFDs. Scalping involves placing multiple trades throughout the trading session with a very short term focus. The aim of scalping is to frequently take profits from small price movements. Trades are often exited shortly after becoming profitable.
The time frame for scalping trades is intraday and ideally within a few minutes. This style removes the risk of holding positions overnight. With the holding time for scalping trades being so short this style reduces the likelihood of significant or large losses from adverse market movements.

Scalping is a trading style that allows easy entry and exit and allows profits to be made in all market conditions. Opportunities for short term trades occur in all market periods and during varying levels of activity.

The potential effectiveness of scalping lies in the fact that it is easier to catch small price movements of a stock such as $0.10 than to catch larger less frequent movements of greater than $0.50.

There are different approaches that traders take when scalping depending on the characteristics of the market and the stock itself. Large liquid stocks allow scalps to be made.

Traders use the leverage of a CFD to buy or sell large numbers of shares without having to outlay the full amount to profit from very small movements. An example of this would be to purchase 10,000 shares and to sell for a 3-5 cent profit. Assume you purchase 10,000 share CFDs at $5.00 and then sold at $5.03. The small movement of $0.03 provides a $300 profit (minus commission costs). Similar trades would be entered a number of times throughout the day with small profits continually being taken.

Scalping trades can be made on both long and short trades. If employing this trading style it is important to maintain your discipline and adhere to your exit rules and ensure trades are held for a short term. The risk reward ratio for scalpers should be adjusted to be closer to 1:1 as position sizes and exposure is larger and slight price movements are compounded by frequent trades into larger profits.

Pairs Trading

CFDs allow traders to gain access to a strategy that involves matching two stocks against each other; one through a long and the other a short position. Often opportunities to pair two stocks together occur when a divergence in price of similar shares in the same sector arises.

When a pair’s trade is opened a hedge is created so profits are made on the movement in price of the long position verses the short position. The offsetting nature of this removes the impact of overall market or sector movements. If the overall market was to move in a particular direction the trader should not be impacted since a gain or loss would be offset.
The strategy is simple to construct and is relatively low risk as it is market neutral.

As two stocks are played against each other, risk is limited. Profitability is based on stock selection and not overall market movements.

The strategy is most successful when two highly correlated shares are matched. Finding suitable stocks can involve either fundamental or technical factors to measure correlation and divergence. Historical data can be used to indicate a mean price or comparable ratios such as Price to Earnings. From this information a trader can attempt to profit from being long in the share that is below the mean or underpriced and short the share that is above the mean or overpriced. Profits can be made on both positions if the shares revert to the mean or converge.

Pair’s trades are simple and also inexpensive. The offsetting positions reduce overnight financial costs as the short position generates revenue that can be used to cover the cost of the long. To reduce costs and mitigate risk the position size for each trade should be hedged and matched equally. Although this is a low risk strategy it is possible for stock specific factors to cause the divergence to widen resulting in losses on both positions. Traders should maintain stop-losses on both positions in case the stocks drift apart rather than come together.

An example of shares that may be suitable for pairs trading is selecting two highly correlated stocks such as National Australia Bank and Commonwealth Bank. Traditionally both stocks should move together as their businesses are similar.

Share and Share CFD prices are affected by a number of variables. Key factors that may play an important role in determining share values are:

Earnings and Other Fundamental Numbers

It is largely company performance that drives share prices. If you buy a share, then you buy a slice of the company, a slice of its successes and failures. A company that performs well attracts more interest in its shares. Interest translates to demand, and demand translates into higher prices. The converse is true for a company that performs disappointingly.

To determine company performance, traders and analysts examine several fundamental figures (i.e. numbers derived from a company’s balance sheet and income statement). A company’s earnings – the amount it makes after paying its expenses – is typically the most important of these. Yet there are other fundamental numbers such as the return on equity (ROE) and the price-to-book ratio that present traders with an indication of the overall health of a company. There will be more about company fundamentals in coming weeks.

Companies can do two things with profits: they can keep and reinvest them or they can pay shareholders a dividend. Dividends are per-share payments so if a company with 1,000,000 shares issued pays a $5,000,000 dividend, each share receives $5.

Traders value dividends highly because they represent regular cash returns on investments. Since dividends are prized, a company can boost share value by boosting its dividend (though investors will want to see that the company can afford this generosity). Companies increasing dividends generally enjoy stock-price increases, whilst the converse is equally true. Despite this, fewer companies pay dividends nowadays and instead retain earnings to reinvest in the company. In such cases, an investor who needs regular income is forced to sell at least some shares or invest, instead, in companies that do generate dividends.

Dividends on Share Positions

Shareholders of companies that pay a dividend will receive the dividend in their preferred method ie reinvested or a direct credit to their nominated account. To be entitled to a dividend a shareholder must have purchased shares before the ex dividend date.

Dividends on CFD Positions

When dividends are paid on underlying shares, holders of long CFD positions qualify for dividends. Holders of short CFD positions have to pay an amount equal to the full (gross) dividend paid on underlying shares.

Cash dividends are booked on ex-date to reflect market price movements on the ex-date. Dividends on CFD positions are cash adjustments paid or debited by First Prudential Markets and not by the underlying company. Dividends paid on CFDs are not eligible for franking credits associated with dividends paid on physical shares, so may differ from the dividends payable on underlying shares.

Economic announcements, usually released by governments and other large groups, include interest rates, gross domestic product (GDP), unemployment figures etc. They often affect the economy as a whole, not just an individual company. Such news may well be important to you as a trader, but you should not miss it because it is scheduled months in advance. Traders know a year in advance when the U.S. Federal Open Market Committee (FOMC) will meet to discuss interest rate changes. Likewise in the UK and Australia, the government’s budgets and mini-budgets are scheduled well ahead of the actual events. This gives you plenty of time to research the likely content of announcements and position your portfolio accordingly.

Investment analysts, economists and other market participants constantly analyse these announcements, trying to second-guess their content. Analysts seldom agree, but the body of opinion produces what is called the “consensus estimate” and is broadly reliable.

Familiarity with the consensus estimate lets traders to take advantage of price movements once the economic announcement is released because the consensus estimate will already be “priced in” to the value of the market. Investors will have placed trades before the announcement to take advantage of where they believe shares will move. If the economic announcement matches the consensus estimate, then prices will barely move because most institutional investors have already placed their trades. It is only really when the consensus estimate has been inaccurate because the market is wrong-footed that prices have to adjust to accommodate the new economic realities. At such a time, when market participants are scrambling to factor in the new information, you will have opportunities to capitalise on price movement.

General Shifts in Market/Sector Strength

Companies prefer their stock price to reflect their individual corporate performance, yet other general market forces can lift or lower share values regardless of that performance.
There’s an old adage that every trader ought to know: “A rising tide floats all boats.” Simply put, it means that in a bullish market most stocks go up because the market and the economy in general are going up. On the other hand, it means that in a bearish market, most shares go down because the market and the economy in general are going down.
This truism may apply to the market in general but not necessarily to certain sectors of it. For instance, healthcare stocks may be booming but retail shares may be slumping. Bullish and bearish forces within individual sectors can have the same impact on the stocks within those sectors as bullish and bearish forces can have on the overall market. Nothing is set in stone.

We will tell you more about the analysis of market and sector trends in a later section. Right now simply knowing that these forces exist will put you well ahead of most retail traders.

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DISCLAIMER: This material on this website is intended for illustrative purposes and general information only. It does not constitute financial advice nor does it take into account your investment objectives, financial situation or particular needs. Commission, interest, platform fees, dividends, variation margin and other fees and charges may apply to financial products or services available from FP Markets. The information in this website has been prepared without taking into account your personal objectives, financial situation or needs. You should consider the information in light of your objectives, financial situation and needs before making any decision about whether to acquire or dispose of any financial product. Contracts for Difference (CFDs) are derivatives and can be risky; losses can exceed your initial payment and you must be able to meet all margin calls as soon as they are made. When trading CFDs you do not own or have any rights to the CFDs underlying assets.

FP Markets recommends that you seek independent advice from an appropriately qualified person before deciding to invest in or dispose of a derivative. A Product Disclosure Statement for each of the financial products available from FP Markets can be obtained either from this website or on request from our offices and should be considered before entering into transactions with us. First Prudential Markets Pty Ltd (ABN 16 112 600 281, AFS Licence No. 286354). FP Markets is a group of companies which include, First Prudential Markets Ltd (registration number HE 372179), a company authorised and regulated by the Cyprus Securities and Exchange Commission (CySEC License number 371/18, Registered Address: Griva Digeni, 109, Aigeo Court, 2nd floor, 3101, Limassol, Cyprus. FP Markets does not accept applications from U.S, Japan or New Zealand residents or residents from any other country or jurisdiction where such distribution or use would be contrary to those local laws or regulations.

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Please confirm how you would like to proceed.

Thank you for visiting FP Markets

The website www.fpmarkets.com is operated by First Prudential Markets PTY Ltd an entity that is not established in the EU or regulated by an EU National Competent Authority. The entity falls outside the EU regulatory framework i.e. MiFID II and there is no provision for an Investor Compensation Scheme.

Please confirm, that the decision was made independently at your own exclusive initiative and that no solicitation or recommendation has been made by FP Markets or any other entity within the group.

What Is CFD Trading?

A CFD, or Contract for Difference, is an agreement between two parties to exchange the difference between the opening price and closing price of a contract. CFDs can be traded on a wide range of over 4000 global markets.

CFD trading explained

Put simply, CFD trading lets you speculate on the price movement of a whole host of financial markets such as indices, shares, currencies, commodities and bonds, regardless of whether prices are rising or falling. When you trade CFDs you are speculating on the price movement of your chosen asset rather than actually owning the underlying instrument.

CFDs are a popular way for investors to actively trade financial markets. This is because CFDs are:

  • Flexible – you can trade on rising as well as falling markets
    Trade on falling markets (going short) as well as rising markets (going long)
  • Leveraged products
    Use a small amount of money to control a much larger value position
  • Hedging tools
    You can use CFDs to offset any potential loss in value of your physical investments by going short

How does CFD trading work?

When you open a CFD position you select the amount of CFDs you would like to trade and your profit will rise in line with each point the market moves in your favour.

If you think the price of your chosen market will go up, you click buy and your profits will rise in line with any increase in that price.

However, if the price falls, then you will make a loss for every point it moves against you.

For example, if you think the price of oil is going to go up then you could place a buy trade of 5 CFDs at the price of 5325. If the market rose 30 points to 5350 and you closed out your position, you would make a $150 profit, 30 times the 5 contracts that you bought.

However, if the market moves against you and the price of oil falls 30 points to 5300 then you would lose $150.

Trading on falling markets

Unlike traditional share dealing, if you believe a market will fall in value, with CFD trading you can sell a market – known as going short – and make a potential profit from falling prices.

Example
The US 500 is trading at 2340. You believe the US 500 will fall as you expect the forthcoming US earning season to disappoint.

You open a sell position of 5 US 500 CFDs at 2340.

The US 500 falls by 65 points to 2275 and you decide to close your trade.

Hedging

As CFDs allow you to short sell and therefore make a potential profit from falling market prices, they can be used as a tool by investors as ‘insurance’ to offset losses made in their physical portfolios.

For example, if you hold $5,000 of Commonwealth Bank shares and you concerned that they are due for an imminent sell-off, you can help protect your share portfolio by short selling $5,000 of Commonwealth Bank CFDs.

Should Commonwealth Bank share prices fall by 5% in the underlying market, the loss in value of your share portfolio would be offset by a gain in your short sell CFD trade. In this way, you can protect yourself without going through the expense and inconvenience of liquidating your stock holdings.

CFD trading is a margined product

This means you trade by paying just a small fraction of the total value of the contract.

Remember that with leveraged trading, there is a potential for your losses to exceed deposits.

In other words you can put up a small amount of money to control a much larger amount potentially magnifying your return on investment. Remember, however, that your losses will be magnified as well, so you should manage your risk accordingly.

Which CFD markets can I trade on?

City Index offers a choice of over 4,500 CFD markets, including:

  • Indices such as Wall St and UK 100
  • FX such as AUD/USD, GBP/EUR and USD/JPY currency pairs
  • Shares such as Commonwealth Bank, BHP Billiton and Telstra
  • Commodities such as oil, gold and cocoa
  • Other markets including bonds, interest rates and options

Is CFD trading right for me?

CFD trading is ideal for investors who want the opportunity to try and make a better return for their money.

However, it contains significant risks to your money and is not suitable for everyone. We strongly suggest trading on a demo account before you try it with your own money.

CFD trading may be ideal for people:

  • Looking for short term opportunities
    CFDs are typically held open for a few days or weeks, rather than over the longer term
  • Who want to make their own decisions on what to invest in
    City Index provides an execution only service. We will not advise you on what to trade or trade on your behalf
  • Looking to diversify their portfolio
    City Index offers over 4,500 global markets to trade on including shares, commodities, FX and indices
  • Be as active or passive as they want
    You can trade as little or as often as you want

Trade CFDs on over 4,500 markets

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Pricing and Charges

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Economic calendar

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Trading with us

City Index is a trading name of GAIN Capital Australia Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

GAIN Capital recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com.au, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade.

GAIN Capital Australia Pty Ltd, 100 Harris street, Pyrmont, NSW 2009 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.

† 1 point spreads available on the UK 100, Germany 30, France 40 and Australia 200 during market hours (excluding futures).

© 2020 City Index

All trading involves risk and losses can exceed deposits.

What is CFD

CFD Meaning

Thus, What are CFDs? CFDs are derivative financial instruments by their nature that provide traders with an opportunity to make profit on price movements of various assets, allowing opening long positions when the asset prices go up and short positions, when the prices go down. The CFD value linked to the underlying asset moves in the same direction as the price of the underlying asset and depends on the same factors. At the same time being much more flexible and accessible, contracts for difference present a number of advantages, such as low cost, trading with leverage and market diversification, compared to trading the underlying asset directly.

CFD Example

If you are still asking “What is a CFD?” it is worth to bring a CFD Trading Example that will help you to imagine it in practice. Let’s say the initial price of Apple stocks is $100. You conclude (buy) a CFD contract for 1000 Apple stocks. If the price then goes up to $105, the sum of the difference, paid to the buyer by the seller will equal to $5,000. And vice versa, if the price falls to $95, the seller will get the price difference from the buyer equal to $5,000. The contract does not imply physical ownership or purchase/sale of the underlying stocks that enables investors to avoid the registration of the ownership rights for the assets and the associated transaction costs.

Start earning now in giant market

Principles of CFD Trading

CFD imitates the profit and loss for real purchase or sale of an asset. The contract provides an opportunity for trading in the underlying market and make a profit without actually owning the asset.

Let us assume that you expect the rally in metals market to continue and you want to buy 1000 stocks of Freeport-McMoRan Copper & Gold Inc. (FCX), the world’s largest publicly traded copper producer. You can buy these stocks through a broker paying a considerable portion (according to the regulatory norms of the Federal Reserve, the initial margin is currently 50% in the U.S.) of the total value of these stocks and take a leverage from the broker for the other part and, moreover, to pay commission to the broker.

Instead, you can buy CFD contract for 1000 FCX stocks. To buy this contract you would have to make much lower margin deposit (2.5% of the total value of stocks provided by IFC Markets).

What is CFD Trading

The question “what is CFD trading?” is the most frequent one among beginner traders, who are just starting out in online trading. CFD is a versatile investment instrument and it is traded by the same method as currencies are done.

Alongside with these instruments, IFC Markets has developed new types of CFDs – Continuous CFDs, i.e. contracts that do not have expiration dates. These Continuous CFDs imply that investors themselves decide the dates for closing the contract and taking the profit/ loss. Besides, several below mentioned opportunities make the contracts for difference ideal instruments for online trading.

Margin Trading

Margin trading allows to take a higher position volume in the market by a small sum of the invested capital. When the market moves according to your expected direction the profit increases by the provided leverage, since you had deposited only a part of the total contract value but the profit will be made from the change of the total value. Conversely, in margin trading losses may also increase in case the market goes against your expected direction. That is why it is important to be careful when trading with a leverage: risk management becomes highly important.

Day Trading

Day trading is defined as the process of buying and selling various assets within the same trading day. This means that a trader or an investor is free to make as many trading transactions as he would like within a single day. As leveraged trading enables opening bigger positions with limited deposit amount, trading CFD is possible even in cases of slight fluctuations of the asset value during one day.

Trading Stocks, Commodities, Indices and Currencies

A CFD (Contract for Difference) is a universal trading instrument, which has gained much popularity in the last years. With the help of CFDs, it has become possible to trade on the price movements of various financial instruments, without the need to possess them physically. Nowadays, CFDs allow to trade not only stocks but also major indices, currencies and commodities.

Trading on both Rising and Falling Markets

CFD is a flexible investment instrument. When you believe the market will rise you can make a profit by buying CFD which is known as going long. You can also speculate on falling prices by selling CFDs, known as going short. Holders of open buy positions on Stock CFD get a dividend adjustment equal to the announced dividend payment amount, if they have a long position open on the instrument at the beginning of trading session on the adjustment payment day (coincides with the ex-dividend date). In contrast, the dividend adjustment is deducted from customer’s account in case of a short position.

Hedging the Investment Portfolio

If you believe that stocks you own are going to fall in price but still want to hold them, you can use the hedging strategy to protect your portfolio from risks by opening a short CFD position on your stocks portfolio. Your profits from going short in CFDs will reimburse the loss from the falling prices of the assets in your portfolio. You will carry lower transaction costs compared to hedging by selling the physical stocks in order to buy them back cheaper later.

CFD trading instruments at IFCM

Stock CFD Trading

This group includes CFDs on highly liquid stocks of companies that are traded on the world stock markets.

Commodity Futures CFD Trading

Commodity Futures CFD Instruments allow investing in price dynamics of commodities through liquid futures.

Continuous Index CFDs

The instruments of this group allow to trade indices of leading stock exchanges and currencies. The price of instruments is expressed in local …

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