The underlying assets of contracts for difference

CFD Trading

CFDs on shares

The process of buying CFDs on shares is similar to the buying of shares with a traditional broker, but there are important differences you should know about.

Zero ownership - when you buy a share, you physically own a small part of the company. This isn't the case when you buy a CFD. You simply own a contract that is in no way related to the share of the company (the underlying asset), even though the CFD price reflects the company's share price.

Fewer commissions - Commissions for the buying of CFDs are lower than those of the traditional stock market.

Lower margins - Many securities brokers require a 50% margin. CFD brokers allow you to buy shares with a margin that is around 5% (and sometimes less!).

Overnight funding fees - Your broker may charge you a small commission for positions that are held overnight.


CFDs on commodities

As you can see, there is no shortage of options to trade commodities with CFDs, and this is only a partial list:

Livestock | Cocoa | Coffee | Copper | Corn | Cotton | Gas | Gold | Construction timber | Oats | Oil | Palladium | Platinum | Silver | Soy Beans | Sugar | Corn

You already know that CFDs are contracts that track an underlying asset, but if you plan to trade CFDs on commodities, you must also understand the underlying product!

Here are the main differences to keep in mind before buying CFDs on commodities versus buying the underlying product itself:

- A good has an expiration date that you don't have to worry about when buying a CFD.

- If you want to enter the commodity market directly, be prepared to spend a lot of money, whereas CFDs can be bought at a lower cost.

- Commodities are valued on the futures market, but all contracts traded on the futures market have a different expiration date. This can be seen on price charts that display two months of information, but CFD prices are based only on the current month. If you want to base your buying and selling decisions on more complete information, in most cases you will need to obtain this information from a source other than a CFD broker.

Note: CFDs on commodities are not recommended for new traders. You need to have a thorough understanding of the general commodity market and what you are trading indirectly before you dive in!


CFDs on currencies

You are likely familiar with the term "forex" which is an acronym for FOReign EXchange, the foreign exchange market. Traders simultaneously buy and sell a currency to take advantage of movements between a currency pair.

Currency trading is fast and always happening. It is not done through a centralised exchange, and you can trade the forex 24 hours a day, 7 days a week. There is no closing bell here, and fortunes can be made and lost in the blink of an eye. Forex trades are often short-lived "scalping" trades, they can last a few hours, minutes or even seconds.

To give you an idea of the sums of money that flow daily through the forex, the average daily turnover is $5 trillion.

Here are the main currency pairs:

  • EUR | USD
  • GBP | USD
  • USD | CHF
  • USD | JPY
  • USD | CAD
  • AUD | USD
  • NZD | USD

And here are the crosses that are not included among the major pairs, as the American dollar is entirely absent:

  • EUR | CHF
  • EUR | GBP
  • GBP | AUD
  • AUD | JPY

The first currency indicated (on the left) in a pair is called the base currency (also known as the main currency), and the second one is called the quote currency. Currency pairs are quoted with four or five decimal places, the fourth decimal point represents a variation point known as a "pip". If the price from EUR to USD is 1.2200 (ie 1 euro = 1.2200 dollars) and it moves to 1.2201, it has increased by 1 pip. The prices displayed by your broker come from the biggest banks and corporations on the planet that move hundreds of millions - if not billions - of dollars at a time.

The forex is a highly speculative market, but it offers some advantages:

  • It's a market that is always open
  • Margins are extremely low, combined with flexible trade sizes
  • Broker commissions are low
  • And it's the most liquid market in the world

There is also, however, a major disadvantage:

The leverage offered by the brokers greatly increases your risks. In this context, a new trader can be compared to a person speeding off in a brand new sports car without a driver's license - he or she will either make it or break it! (Article to help you understand the basics of forex trading -> Beginner's guide to forex trading)


CFDs on stock indices

CFDs based on stock indices are functionally quite similar to CFDs on shares, but they represent a group of shares of companies that have a common element. For example, one index may include nothing but tech companies, or pharmaceutical companies, or whatever.

The Dow Jones Index consists of the top 30 US companies, the index price is weighted by the size of each of the companies that make up this index. In other words, if the majority of the equities of the companies making up the index increase, the value of the index also increases, and vice versa if prices fall.

Indices allow one to easily obtain a certain level of diversity within an investment portfolio, but they are also useful for investing in the economy of a given country.

Here are some of the world's biggest stock market indices:

  • Australia: XJO
  • France: CAC40
  • Germany: DAX
  • Japan: Nikkei
  • United Kingdom: FTSE
  • United States: NASDAQ
  • United States: Russell
  • United States: S&P500
  • United States: Dow Jones

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