In this lesson of the CFD course, we will focus on the details of CFDs . Before trading, in fact, it is always better to understand what you are really trading with. In the previous lesson we have seen what CFDs are in general, while now we are going to discover all their peculiarities at an operational level.
CFD details, how to view them
Before trading, it is good to know what you are trading on . In the image below, we see, for example, the information about the CFD on Amazon shares provided by eToro.
As you can see, the elements that make up the asset details are numerous. Before explaining them one by one, let’s see how to visualize them.
Information on CFDs is always available on trading platforms , however, its location is different depending on the platform. To view them on the eToro platform, simply type the name of the asset in the search box at the top.
Or you can follow this procedure:
- Click on the markets (left column
- Choose the asset category that interests you
- Scroll down the page to find the title of the sector that interests you the most
Note: on eToro you can trade, in addition to stocks, also on Forex, cryptocurrencies, commodities and stock indices.
For the Plus500 platform, for example, to view the details of CFDs, click on the «i» located to the right of the lines showing the name of the tradable assets (see figure below), or within the window of the order, then click buy or sell.
The details of the CFD, explained one by one
In the previous figure we have seen that the CFD information can include several elements including the name of the underlying asset , that is:
- Name of the asset;
- Value or amount of the lot;
- Required margin;
- Overnight rates.
We are going to explain them to you in a simple and exhaustive way below.
Name of the underlying asset
As we saw in the first lesson, CFDs track the performance of an asset. Its price, therefore, follows the trend of a listed financial asset.
The asset that is replicated by the CFD is called the ‘underlying’ or ‘underlying asset’. For example, for Amazon CFD, the underlying asset is the Amazon share.
Among the most important details of the CFD is undoubtedly the spread.
The spread in CFD trading represents the difference between the Bid (Buy) price and the Ask (Sell) price at a given time. To understand this better, let’s look at the following figure, as you can see we have:
- Buy (Sell) price: 1897.72
- Offer price (buy): 1901.71
The difference between the ask price and the bid price, therefore, is called the spread.
Propagation is important for several reasons:
- The first reason is that the smaller the spread, the cheaper the transaction. In fact, the spread represents the broker’s fee, which maintains the spread at the time of opening the position.
- The second reason is that the spread varies by asset and especially by asset category. In fact, it is wider in markets with high volatility, and generally the tightest spreads can be found on Forex. In contrast, for cryptocurrencies there are very wide spreads, due to high volatility.
For this reason, before opening a position, it is always necessary to consider the amount of spread that will be subtracted from your available account and will be considered in the profit / loss account of the operation (that is why the operations always start with a loss ) .
Value or quantity of the lot
In the order window you can select the volume of contracts to be traded. This can be expressed as a quantity (see figure below) or in units (number of values).
Leverage (among the most important information of the CFD)
Leverage is the relationship between the security you are trading on and the actual investment required.
CFD trading was born and famous for this: it allows you to trade by investing much less capital than is required in traditional investing (in the face of additional risks).
This means, for example, that with 1:20 leverage if you want to invest in Amazon shares worth a total of € 1,000, instead of spending € 1,000, you will invest only € 50 (equal to € 1,000 / € 20).
As we will see, the required margin is divided into initial margin and maintenance margin.
However, the leverage varies depending on the CFD. Forex CFDs generally have the highest leverage (as well as the lowest margin!), While the lowest are the levers of stocks and especially the levers of cryptocurrencies.
The required margin is the amount of money that the trader must momentarily subtract from his available capital to open the position.
The required margin consists of two parts:
- Initial margin – the amount of money that is actually used for CFD trading
- Maintenance margin: an amount that the broker temporarily holds to avoid cases of excessive and unmonitored losses, or a margin to keep the position open.
When you close the position, this happens:
- Maintenance margin is returned
- The initial margin is returned net of the gains and losses incurred. This means that there can be gains but also losses. Losses can even cover the entire capital deposited (for this reason it is always better to set the stop loss that we will discuss in the next lessons)
Note: The required margin may differ depending on whether you open a long (buy) or short (sell) position.
Nightly fees are also applied to keep the position open the next day. These are daily, so there are 3 overnight stays on the weekend (Friday night, Saturday night, Sunday night).
The cost of nightly rates is low, but in the long run it might feel slightly. For example, for a $ 500 position of Amazon shares in the purchase, the overnight fee charged by eToro is $ 0.56 per day. For ten days it would be $ 5.6. For 100 days it would be $ 56.
Go to the next lesson: When to trade CFDs, useful tips
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