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On which of the following could you place a CFD trade (Please select all answers that apply)?
You can trade CFDs on all of these and a vast range of other financial assets and products, including interest rates, government bonds and options.
When you trade CFDs, you always make a fixed amount of profit if you’re right about which way a price will move, or a fixed loss if you’re wrong…
With CFDs, you generally gain or lose more depending on the degree to which you’re right. If the price moves the way you anticipate, then your profit will continue to grow the further it goes. However, if the market moves against you, your losses will increase as the price movement becomes greater.
What is a spread?
When you trade CFDs on a market, you’ll see two numbers – a ‘buy’ price and a ‘sell’ price. The difference between these is the spread. The spread is essentially a fee that your CFD provider charges to place your trade.
What are lots?
CFDs are traded in standardised contracts, sometimes called lots. The sizes and denominations of these contracts differ depending on the asset, often mimicking how that asset is traded in the underlying markets.
You’re looking to take a position on the FTSE 100. The current bid/offer spread is 6008/6010. You decide to buy 100 contracts (1 contract = £2.00) at 6010. By the time you later close the position, the spread is 6012/6014. What is your profit or loss?
As you went long, a rise in the market benefited you. You ‘bought’ at 6010 to open the position and ‘sold’ at 6012 to close it, so the market moved two points in your favour. This is multiplied by the number of contracts (100) and the £2.00 contract size.
Which of these are true for future/forward contracts?
Future/forward contracts have a set expiry date. Spreads tend to be wider, but overnight funding costs are lower and built into the price. This makes these contracts popular for longer-term trading.
Which of these apply to CFDs?
Providers generally charge a fee for holding CFDs overnight and on share CFDs, instead of a spread, they charge commission. If you place a CFD trade in a different currency to your base account, you may need to pay a conversion fee on any profits you make.
Joe opens a CFD buying two contracts on the German DAX 30 index (contract size €25) and another CFD buying four contracts on the French CAC 40 index (contract size €10). If each of these indices then falls by three points, which position gives Joe the greater loss?
Although Joe bought fewer contracts on the DAX than on the CAC, the larger contract size means the overall loss is greater on this CFD. His DAX loss is 2 x €25 x 3 = €150. His CAC loss is 4 x €10 x 3 = €120.
When might you receive a margin call?
You can usually open a CFD account free of charge. However, you’ll need to deposit money to cover the margin requirements if you want to start trading, and you may need to top this up as the market moves. If the funds on your account drop below the level required to maintain your positions, your provider will ask you to deposit more money or risk having your positions closed.
Which of these benefits apply to CFD trading?
These are just some of the many reasons you may choose to trade CFDs. However, remember to always assess the risks involved as well as the advantages.