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If you were to trade a CFD on the movement of the collective value of a group of shares, which type of market would you be taking a position on?
A stock index is a group of shares. When you trade an index CFD, you are therefore taking a position on whether the collective value of those shares will rise or fall.
Which of these factors can affect the size of a market's spread?
In order to calculate the spread to offer on a market, providers will take into account a number of factors that may affect how easily it can be traded, including its volatility, its liquidity, as well as the time of the day.
With share CFDs, you trade at the underlying market price.
When trading share CFDs, the costs of dealing are designed to mimic trading in the underlying market.
Which costs will you have to take into account when trading share CFDs? [Please select all answers that apply]
Instead of a spread, most providers charge commission in order to match the underlying share price. You’ll need to consider this fee, as well as the margin or deposit you’re required to put down. There could also potentially be other costs, such as overnight funding charges, which we explain in the ‘How does CFD trading work’ course.
What do CFD providers derive their buy and sell prices for an index from during normal trading hours?
Unlike shares, forex or commodities, you can’t buy and sell stock indices directly in an underlying market. However, they can be traded via derivative futures contracts, and CFD providers use the prices of these contracts as the basis for their stock index markets.
When trading out of hours, what do CFD providers use to calculate the price of an index?
By applying a mathematical formula to related markets around the world, providers are able to create a buy and a sell price for an index even when the stock exchange and futures market are closed.
What usually happens to spreads on stock indices during out-of-hours dealing?
When underlying stock and futures markets are closed, CFD providers derive out-of-hours prices by applying a mathematical formula to related global markets. They also take into account dealing activity and any relevant news events. This means that out-of-hours prices can be quite different to the prices available when the underlying markets re-open. However, widening the spread gives providers a better chance of accurately reflecting underlying index levels.
Orange juice is currently at a bid/offer price of 11405/11465. You decide to ‘buy’ at 11465. Which direction would the market have to move, and by how many points, in order for you to make a profit?
As you’ve gone long, the market has to rise in order for you to profit. You’d have to ‘sell’ at a higher price than 11465, and the 60-point spread on this market means the price would have to move by more than 60 points.
Your CFD provider offers you a bid/offer price that it has sourced from a network of institutions. What are you trading on?
Any assets traded on a centralised exchange, including stock index futures, have standard prices in the underlying market from which CFD prices can be derived. However, over-the-counter (OTC) markets such as forex are traded via networks of banks or brokers who generally quote differing prices. A good CFD provider will source prices from a number of different brokers to seek the best deal for its clients.
Each commodity is traded in a standard unit of measurement - gold in troy ounces, for example, or cocoa in tonnes - but they're all priced in dollars.
Different commodities are traded in a variety of standard units of measurement, although these are always constant for each particular commodity. Most commodities are priced in dollars, however this is not always the case. When trading CFDs it’s important to check how much one contract is worth for each commodity – this can vary considerably.