CFD - Contract For Difference
Posted by Olga Palikarpava on 29 May 2015 12:12 PM
Contract For Difference is an agreement (guarantee liability) between two parties on the payment of the difference between asset's current value and its value at the end of the agreement period. In fact, the parties conclude an asset buy/sell contract with deferred delivery implying that the delivery actually won't occur — commodity obligations will be closed with the second reverse buy/sell deal (where the buyer becomes the seller) with the same volume but at different value (price). If the asset's value increased then the first deal's buyer receives the difference in the price from the seller. If the value decreased then the first deal's seller receives the difference in the price from the buyer. Often the contract validity period is not set and the contract can be terminated by one of the two parties who was granted that right.
Example 1. You buy CFD on S&P 500 (SPX) index expecting the index to increase. Placing a buy order for 1 lot you buy 250 contracts at $2,112 per contract.
Thus the value of transaction in money term is:
V= 2112 USD * 250 contracts= 528,000 USD.
The security charge is 1.5% of $528,000, that is $7,920.
After a while with the quote going up to $2,220 per contract we get:
V= $2,220 * 250 contracts= $555,000.
Trading CFDs is very similar to FX and the examples below show the commission you will pay and how to calculate your profit and loss.
Profit = £50 (5 ticks * £10 per tick)
CFD main advantages:
We invite you to explore exchange trading!