What is a contract for difference?
A contract for difference (CFD) is a form of derivative trading that allows you to make a potential net profit by predicting the rise and fall of the rapidly changing global financial market (or product) prices such as stocks, stock indexes, foreign exchange, and bonds.
The advantages of CFD trading include that you can trade on margin, and you can trade in both rising and falling markets: if you think the price will fall, you can go short (sell); if you think the price will rise, you can go long (buy) . You can also use CFDs to hedge your existing physical investment portfolio.
When trading CFDs, you did not buy or sell related underlying assets (such as physical stocks, foreign exchange currency pairs). We provide CFD transactions for thousands of global financial products. You can buy or sell a certain number of units of a certain product or financial instrument based on your own judgment on the rise or fall of prices. Our product range is wide, including stocks, bonds, foreign exchange currency pairs and stock indexes, such as the Australia 200 Index.
Every time the price of a financial product moves one point in a direction that is beneficial to you, your earnings can double by the number of units you buy or sell. If the price moves one point in a direction that is unfavorable to you, you will suffer a loss. However, please note that the loss may exceed the funds you have invested.
A CFD is a leveraged product, which means that you only need to invest a small portion of the full value of the transaction to establish a position. This is called "margin trading" (or margin requirement). Although margin trading can magnify your profits, it can also magnify your losses, because they are all calculated based on the full value of the position, which means that your loss may exceed any invested capital.
Spread: Like all markets, you must pay the spread when you engage in CFD transactions, that is, the difference between the buying price and the selling price. You enter the buying transaction at the bid price and exit the transaction using the selling price. As one of the world's leading providers of CFD trading, we understand that before you start to make a profit or lose money, the narrower the spread, the less you need to change the price in a direction that is beneficial to you. Therefore, we always provide competitive spreads so that you can make the greatest possible profit.
Position cost: After the end of each trading day (5:00 pm New York time), any position held in your account may incur a fee called "position cost". The holding cost may be positive or negative, depending on the trading direction of your position and the applicable holding rate.
Market data fee: If you want to trade or view our stock CFD price data, you must pay a certain fee to activate the relevant market data subscription. Check out our CFD market data fees.
Commission (only applicable to stocks): When trading stock CFDs, you must also pay a separate commission. In the AIM CFD trading platform, the commission for stock CFD trading in Australian dollars is calculated from 0.10% of the full exposure of the position, and the minimum commission is 9 Australian dollars.
In this case, the trading price of Australian company ABC is 98/100 (where 98 is divided into the selling price, and 100 is divided into the buying price). The spread is 2.
You think that the company's stock price will rise, so you decide to buy 10,000 CFDs or "units" at a price of 100 cents. When you initiate the transaction, a separate commission of $10 will be paid because 0.10% of the transaction size is $10 (10000 units x 100 points = $10,000 x 0.10%).
ABC company's margin rate is 3%, which means that you only need to deposit 3% of the total value of the transaction as a position margin. Therefore, in this case, your position margin will be $300 (10,000 units x 100 points = $10000 x 3%).
Please note that if the price changes are unfavorable to you, the loss may exceed your $300 margin, because the loss is calculated based on the full value of the position.
Scenario A: Profitable trading
Your prediction is correct and the price will rise to 110/112 in the next week. You decide to end the buy transaction and sell at 110 cents (the current selling price). Please note that you will also incur a commission when you close the transaction, so you need to pay a commission of $11 when you close the transaction, because 0.10% of the transaction size is $11 (10,000 units x 110 points = $11,000 x 0.10%).
The price has moved 10 cents in your favor, from 100 cents (initial buying price) to 110 cents (current selling price). Multiply this by the number of units you bought (10,000) to calculate your profit as $1,000, and then subtract the total commission ($10 at the time of entry + $11 at the end of the transaction = $21), and the final total profit is $979.
Scenario B: Loss trading
Unfortunately, your prediction was wrong, and the stock price of ABC Company fell to 93/95 in an hour. You think that the price may continue to fall, so in order to avoid further losses, you decide to sell at 93 cents (the current selling price) and end the transaction. You will also incur a commission when you close the transaction, so you need to pay a commission of $9.30, because 0.10% of the transaction size is $9.30 (10,000 units x 93 points = $9,300 x 0.10%).
The price has moved 7 points against you, from 100 points (initial buying price) to 93 points (current selling price). Multiply it by the number of units you bought (10,000), you can calculate that you have lost $700, and then add the total commission ($10 at the time of entering the transaction + $9.30 at the end of the transaction = $19.30), and the final total loss is $719.30.
If you think that a product will depreciate and decide to sell, and your prediction is correct, you can buy the product again at a lower price to make a profit. If your forecast is incorrect and the value of the product rises, you will lose money. The amount of loss may exceed your investment.
If you have invested in a portfolio of real stocks through other brokers and believe that the portfolio will depreciate in the short term, you can hedge the real stocks through CFDs. By short selling the same stocks in a CFD, you can try to make a short-term downside profit, thereby offsetting any losses in your existing portfolio.
For example, suppose you hold ABC company stock worth $5,000 in your investment portfolio; you can short the ABC company stock of the same value through a CFD. Later, if the stock price of ABC Company declines in the underlying market, the depreciation in your real stock portfolio may be offset by the profits obtained in the short sale of the CFD. You can then end the CFD trading and make a profit at the end of the short-term downturn, and the value of your real stock will start to rise again.
Hedging real stock portfolios with CFDs is a common strategy used by many investors, especially in volatile markets.
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