Invest in CFD's?

CFD's are a contract between two parties stating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time (or visa versa if a negative amount)

What are CFD's

Contracts For Difference (CFDs) are specialised and popular Over The Counter (OTC) financial derivative products which enable you to trade on the price movement of financial assets Indices Futures, Commodity Futures, Cryptocurrency, Shares and Exchange Traded Funds.

They enable clients to trade freely without actually owning the underlying asset or acquiring any rights or obligations in relation to the underlying asset. The main benefit of trading CFDs is the flexibility to trade against the price movements without actually buying or selling the physical instrument.
CFDs derive their price from the underlying asset. You can trade CFDs if you believe the price of a financial instrument is likely to go up in value (strengthen) and if you think it is likely to go down (weaken). Your profit or loss in online CFD trading is determined by the difference between the price you buy at and the price at which you sell.

Leverage and Margin

Benefits and risks of leverage
Trading on margin means you can gain the same amount of market exposure by depositing just a small fraction of the total value of your trade. This leverage can be useful to CFD traders because it means that they can put their money to use elsewhere.

Leverage can help magnify your returns which is great news if the market moves in the direction that you expect. However, the key risk with leverage is that it can magnify your losses in exactly the same way as your gains.

There is the potential to lose part and more of your investment if you do not manage your risk efficiently. Remember with leveraged trading your capital is at risk.

For instance, say the margin requirement for a particular market is 5%. This means you would be required deposit 5% of the full value of the trade as initial margin to open the position.

Share trading vs CFDs using leverage
You want to buy 1,000 shares in company ABC and the current share price is 250p. Your total investment is £2,500. The equivalent as a CFD trade would be to go long (buy) 1000 CFDs in company ABC.

Long and Short

Long Position
A long position when trading in CFDs is when a trader purchases the asset. This will mean that the asset will rise or see an increase in its value over the time of life of the contract.

In long term trading, as it has a higher level of forecasting ability will allow traders to act on lower price market moves.  Trades normally last from month to more than a year.

Short Position
The short position occurs when the trader feels there will be a decline in the assets value and a ‘sell’ is selected, however there is an intention from the trader to buy the contract back at a later stage.

E.g.: A short seller’s expectation is that the price of the asset will fall over the life of the contract. If his prediction is wrong and the price of the asset starts to rise the open trade will sustain a loss, which is calculated by the difference between the opening and closing price of that asset over that time. The reverse is true should his open trade indicate that the asset chosen would decrease in value.

Short term trades can allow profits from short time spans even up to minute-to-minute moves. Limiting financial costs is an advantage in short term trading.

Risks

The information on investment products is for general information and is not intended as an advice. In spite of the fact that Binckbank takes care of the compilation and maintenance of these pages, using sources deemed reliable Binckbank can not guarantee the accuracy, completeness and actuality of the information provided. If you use the information provided without verification or advice, do so for your own account and risk. We advise you to always check any transactions and not to invest in financial instruments that you do not understand the risks. No rights can be derived from the information on these pages.