CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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Question 1 of 10

On which of the following could you place a CFD trade (Please select all answers that apply)?

Please select all answers that apply
  • The price of a company's shares
  • The value of one currency against another
  • The price of a commodity such as crude oil
  • The level of a stock index, such as the Dow Jones

Explanation

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.

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Question 2 of 10

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…

  • A True
  • B False

Explanation

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.

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Question 3 of 10

What is a spread?

  • A The change in the price between opening and closing a position
  • B The gap between the prices at which you can 'buy' or 'sell'
  • C The deposit you pay when you place a trade
  • D The range of markets you can speculate on

Explanation

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.

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Question 4 of 10

What are lots?

  • A The increments by which a CFD price moves
  • B Traders’ slang for CFD positions
  • C The standardised contracts in which you trade CFDs

Explanation

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.

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Question 5 of 10

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?

  • A £400 loss
  • B £200 loss
  • C £400 profit
  • D £40 profit

Explanation

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.

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Question 6 of 10

Which of these are true for future/forward contracts?

Please select all answers that apply
  • They have a fixed expiry date
  • They tend to have tighter spreads than cash CFDs
  • Their overnight funding costs are higher than for cash CFDs
  • They are used to speculate on longer-term market movements

Explanation

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.

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Question 7 of 10

Which of these apply to CFDs?

  • A Currency conversion rates
  • B Overnight funding charges
  • C Commission on shares
  • D All of the above

Explanation

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.

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Question 8 of 10

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?

  • A DAX 30
  • B CAC 40

Explanation

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.

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Question 9 of 10

When might you receive a margin call?

  • A When you apply to open a CFD account
  • B If you don't have enough money on your account to fund your positions
  • C After you've taken a large profit

Explanation

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.

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Question 10 of 10

Which of these benefits apply to CFD trading?

  • A You can capitalise on falling, as well as rising markets
  • B You can trade 24 hours a day on some markets
  • C Leverage can give you larger exposure to a market with a small deposit
  • D All of these answers

Explanation

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.

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