In this CFD tutorial, we will present an illustration of a CFD trading case study to show you how CFD trading works and help you have a very clear idea about how this works. Lets say we have a cash float in our hand that is worth of $8000 and the CFD broker that we are working with is offering a 10:1 leverage. This means, our float is leveraged up to $80,000.
Before you start trading CFDs, it is important to carefully consider the risks in dealing with CFDs as an avenue to gain exposure to market fluctuations. CFDs are a risky financial product and it is very important that you are aware of the speculative nature of CFDs. A CFD is a highly leveraged financial product and hence carries a greater risk compared to non-geared trading vehicles such as share trading.
You’re a CFD trader and you’ve received your first CFD Margin Call. A margin call is sent to you by your CFD provider if one of your open CFD positions move against your current position and the move has consequently led to your account equity to fall below your margin requirements. Margin calls can be made at any time (usually when the market is open – or when dealing with forex – it can happen anytime 24/7)
When trading CFDs, your CFD broker requires you to have a certain amount of cash equity in your CFD trading account. When you open a CFD position, your trading account must have enough cash to fund their margin requirements. Your CFD provider’s margin requirements are typically listed on their website or in their Product Disclosure Statement.
When you are trading CFDs, you may find that the quoted CFD prices by your CFD provider is not the same as the market price of the underlying shares or reference security. Your CFD broker has the right to introduce a spread which may depend on market liquidity and market demand. If you have been dealt a pricing error whilst trading CFDs, it is at the CFD provider’s sole discretion to decide whether the price quoted to you was correct.
If you hold a forex spot CFD position “overnight” you may pay a Rollover charge or be paid a rollover benefit by your CFD provider. It is important to know at what time this “overnight” rollover charge occurs for your timezone.
If you hold a CFD position overnight you may be liable for a financing charge or benefit. If you are long on a Share, Index or Sector CFD overnight you may pay a financing charge to your CFD broker, while if you hold a short position you may receive a financing benefit from your CFD provider.
Yes, your CFD provider can adjust the price of the CFD you are currently holding. These Contracts For Difference adjustments in price is applied by your CFD provider can be applied for Share CFDs, Index CFDs and Sector CFDs. These adjustments typically occur as a result of a company dividend and certain corporate actions (for example, bonus rights issues, rights issues and stock splits)
Compared to the specificity of trading with spot forex, trading currency index CFDs allows the trader to take a general view. This is because the underlying reference is actually a weighted basket of currencies. The weightings are chosen and determined by your CFD broker.
When you trade a Spot Forex, you, as a trader, take a position on the foreign exchange rate of one currency against another (For example, USD/JPY, EUR/USD or AUD/USD). Therefore, when trading with a spot forex CFD you are trading the CFD which has a currency exchange rate as the Underlying Reference Security.