Dear colleagues and traders! Today I, Anna, want to talk about the specifics of trading CFD-contracts. The Forex market is primarily known as a platform for working with currency pairs. But in the context of decentralization, participants have the opportunity to choose any assets that can increase their income.
This feature allows you to earn on the difference in the value of financial instruments, which are represented on large sites. The minimum entry threshold in such cases is reduced. I will tell about it today.
The concept of contracts for difference (CFD)
Three hundred years ago, prices for agricultural goods began to form in an auction. Transactions with equal demand and supply were to be concluded at special exchanges. Now this rule applies to a variety of financial instruments: debt obligations, raw materials, goods, shares.
A special position is occupied by the Forex market. It is decentralized and excludes the possibility of manipulating world currencies. Any currency on the international market is exchanged at free prices, and the current rate determines demand and supply.
In the last century a new kind of tools appeared. They were derived from assets sold on the exchange. Thanks to the appearance of futures and binary options, you can save on taxes, reduce the cost of commission exchanges and use leverage.
The shoulder, which is called leverage, makes it possible to trade financial assets for only a tenth of the cost. The amount of profit or loss in this case is 100%.
The contract for the price difference is indicated on the market as CFD, or Contract For Difference. It is an agreement between the participants. In accordance with it, the difference between the current price of the asset and its value at the time of the termination of the contract is transferred.
This contract is derivative. The percentage here is charged to a shareholding or other underlying asset. The package is equal to one lot, which can be broken up to the value of 0,01 lot.
This type of trade is very popular in Europe and the US. The value of shares of Western enterprises is tens and hundreds of dollars. Binary options and futures can cost as a used car. If the investor can not make large investments, the exit will be the purchase of one security for 5% of the real value.
Thus, a CFD contract is an offer outside the exchange. The broker provides a list of available assets, the price of which is taken as zero. When a trader enters into an agreement for the difference, he deposits a deposit of 2 or 5% of the price of the financial instrument. If the position closes with a positive result, the market participant makes a profit, if not, the loss is written off from the deposit.
Types of contracts for CFD difference
An off-exchange asset, to which a CFD contract is attributed, can be issued on any of the underlying assets. The specifics of the calculations should be clear to both parties to the transaction.
Especially popular are CFDs for shares issued by well-known companies. Tickers, or instrument designations, and quotes coincide both on the forex broker sites and on stock exchanges where transactions with securities are concluded.
Each exchange has an index, which includes "blue chips". So called the shares of the largest, stable and liquid enterprises. The value of the indices is relative, and you can sell and buy them using CFD contracts. As an underlying asset, based on which the price is determined and the difference is calculated, the index futures is favored.
Currencies, bonds and energy futures are also sold as CFD-contracts. In this market, the trader will find a large number of proposals, which is limited only by the imagination and the capabilities of the broker.
Dividends on securities
Until recently, market participants bought shares in the hope of further growth, payment of dividends was not taken into account. But some companies and business projects bring such profit, that the size of payments to shareholders in times exceeds rates on bank deposits. This trend has caused a rapid increase in the value of blue chips and the demand for them from hunters for dividends.
At the end of each quarter or at other intervals, a meeting of shareholders is held. It sums up the work and decides on the payment of dividends. Participants determine what percentage of the profit should be paid, after which it is divided by the number of securities. Then the shareholders set the terms of payment.
Before the meeting of shareholders, a cut-off is made, or the register is closed. The timing of such cutoffs is known in advance. A special registrar takes into account all shareholders, and if a decision is made to pay dividends, the money is transferred to their accounts.
Even if a trader bought shares a few days before the cutoff, he can claim the full amount of dividends. Immediately after the cut-off, the value of securities falls.
The law does not provide for mandatory payments on any arbitrary contracts, including CFDs. Each broker decides this issue independently. Information on the rules for calculating and paying dividends can be found on the companies' websites and in the texts of contracts. Typically Forex dealers do the following. If, during the cutoff, the trader sold CFDs on shares, the amount of dividends will be withheld from the deposit. In the case of their purchase, this amount will be charged. The amount of dividends is calculated per share. There will be 100 securities in a full lot. The share price is multiplied by the number of securities specified in the specification for the concluded contract.
Some time after the cut-off, a meeting of shareholders takes place and payments are accrued. The timing of misfires, meetings, the amount of payments and other data are published in the media, in the terminal for trading and on the official website of the broker. The potential dividend size greatly affects the share price. Until the moment of cut-off, their value can grow, and after that, they can quickly decrease. The discount provided to those who acquired shares after the cut-off is called the dividend gap. Market participants who work with such assets constantly follow the news of corporations in search of quick money. Rumors of big dividend payments are called trends. But the investor should not trust only them. It is necessary to take into account the general state of the economy and the state of affairs in the market.
The advantages and disadvantages of contracts for difference
The popularity of CFD in the market is explained by a number of advantages:
• Accessibility for small investors. To enter the world exchanges, it will take from 5 000 dollars. The participant will have to buy from 10 shares, and the broker will provide the leverage of 1 to 3. The average change in the share price is 30% per year. Forex brokers give traders a shoulder, the size of which can reach 1 to 500. He can trade in the stock market with a deposit of only 100 dollars.
• Minimum of costs. One of the features of CFD is the minimum financing rates and commission. These contracts for the difference in prices favorably differ from some other instruments.
• Common account and terminal. Shares can be traded on different sites. At the same time, the accounts are shared by the broker through exchanges and instruments. High requirements of regulators make it difficult for clients to access trading floors, so participants can not visit all exchanges of interest to them. They are forced to divide funds by transferring money to several accounts, or to open them in different companies.
Trading platforms in the stock markets, too, can vary significantly. They do not have a single coverage.
Disadvantages of CFDs
Cons of contracts for the difference, too. Here are their main disadvantages:
1. A trader who incorrectly took into account the so-called "shoulder effect" may lose the entire deposit.
2. The broker may have problems with the permissive documentation. There is also a risk that the counterparty will not fulfill its obligations.
3. Since the trader does not have ownership rights, the amount of dividends and the fact of their payment remain at the discretion of the broker.
Hidden opportunities for trading CFD a lot. If you are disappointed in working with currency pairs, try the stock market, which is considered more predictable.
The value of shares is constantly growing. The trader only needs to competently assemble the portfolio, distributing the risks. Access to CFD contracts is available from forex broker, and for the selection of companies use specialized sites and forums.
As an example I want to lead a brokerage company 24option , which is part of the top 10. This division specializes in stocks, and with its help a trader will quickly learn the CFD contracts trade.
The strategies used for the investment portfolio of CFDs
Most of the traders who work with CFD for stocks are engaged in their purchase. To identify growing trends, moving averages are used. The period setting can be 200, 100 or 50.
Oscillators are often used, for example, MACD. This is a kind of filter, whose purpose in the market is to prevent overselling and overbought. To determine how reliable the purchase of CFD, apply the tactic "Three Screens" from Alexander Elder. Often market participants use the Murray and DeMark level indicators.
If you have never encountered CFD trading, you should at least try. Exchange contracts give the trader more opportunities and variety than currency pairs. Probably, this kind of trade ideally suits you, and you can collect an optimal investment portfolio, applying best CFD strategies.