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CFD is an affordable and popular financial traders tool. But if you still understand the details, you will be wondering what the definition of CFD is?
“Contract for Difference” (CFD) is an agreement in which an investor buys a contract, waiting for a change in the value of a certain financial product. By purchasing CFD, you do not buy the underlying asset. This means that you can use leverage to increase the size of the contract using a smaller deposit.
CFD trading is an affordable way for forex traders to speculate on the most popular financial markets, such as forex or stocks.
If you want to invest in the movement of the US dollar against the euro, or you have a feeling that Facebook shares will grow rapidly, instead of spending thousands on shares, you take a CFD. Contract for Difference (CFD) allows you to use a fraction of the total value of the lot to invest.
The standard lot size when trading in Forex is 100,000 monetary units (dollars, euros, etc.), although you can also trade in mini lots (10,000) and micro lots (1000).
When you open your trading account, you deposit money into your account, which is your balance or your capital. If you want to open a CFD, you can use the existing leverage to create a margin for your transaction.
For example, if the available leverage is 10: 1, you can put 1000 dollars to get an investment of 10,000 dollars. $ 1,000 is your margin (deposit), and an affordable 10: 1 leverage means that you are ready to make a profit or loss based on the total cost of $ 10,000.
Thus, if your transaction grows by 2% to 10,200 dollars and you close your position, you will receive a profit of 200 dollars. Your initial margin was $ 1,000, so you made a profit of $ 200 on your margin of $ 1,000, which is equivalent to 20% of the profits. However, if the transaction fell by 2%, your loss of $ 200 means that you would lose 20%.
This extremely simplified example also does not take into account the fees associated with the transaction. Some brokers may charge a commission or a fixed commission on any transaction, as well as on a spread.