What is contract for difference?
Education
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What is 'CFD'?
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'CFD' stands for 'contract for difference' and consists of an agreement (contract) to exchange the difference in the value of a currency, commodity, share or index between the time at which a contract is opened and the time at which it is closed.
If the asset rises or falls in price, the buyer receives or earns cash from the seller.
CFD pricing is based on the movements of the underlying asset.
As a very simple example: if you buy a ‘contract for difference’ at $14 and sell at $16 then you will receive the $2 difference. If you buy a CFD at $10 and sell at $8 then you pay the $2 difference.
Basically, a CFD contract means that you are not physically exchanging currencies, nor purchasing any assets, but you are simply making profit or loss based on your speculation of the price movement.
CFD pricing is based on the movements of the underlying asset.
As a very simple example: if you buy a ‘contract for difference’ at $14 and sell at $16 then you will receive the $2 difference. If you buy a CFD at $10 and sell at $8 then you pay the $2 difference.
Basically, a CFD contract means that you are not physically exchanging currencies, nor purchasing any assets, but you are simply making profit or loss based on your speculation of the price movement.
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Benefits of trading CFDs compared to centralised exchange
‘Lots’ are used to represent the trade size in Units.
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Ease of access — trading via online platforms.
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Convenient risk management tools such as stop loss/take profit, ability to specify lower trade sizes.
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Leveraged offerings allow smaller investors to participate.
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Less restrictions, opening and closing positions at any time.
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The possibility of going short (selling) as well as going into debt (buying).
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The ability to hedge risk. i.e. you can trade in opposite directions on the same asset and at the same time.
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Long & Short are simply different terms for ‘Buy’ and ‘Sell’.
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If you open a ‘Long’ position, and the price starts to decrease, you will begin to make a loss. If you open a 'short' position, but the price starts to move up, the trade will begin to go into a minus.
So, traders may say they are going long on a particular asset, or that they are shorting it.
So, traders may say they are going long on a particular asset, or that they are shorting it.
'Long' position (Buy)
In order to make a profit, the asset price must increase.
'Short' position (Sell)
In order to make a profit, the asset price must decrease.
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Stop Loss & Take Profit are technically pending orders that you can attach to positions, to trigger the closing of an order once the specified level is reached.
Used to limit losses, or potentially to take a profit after a loss. It should be placed below the current market price for buy positions, and above the current market price for sell.
‘Stop Loss’
Used to lock in profits at a specified price, or potentially to limit further losses after a substantial gain. It should be placed below the current market price for sell positions, and above the current market price for buy positions.These types of orders can be attached to a position at the time of opening, or you can modify an existing position. They can also be attached to Pending Orders.
‘Take Profit’
This means that setting a stop loss does not mean that you are guaranteed to be filled at the exact level you have set, because the price available in the market at the time may be above or below your requested price.
It is important to note that all Stop orders including stop loss, are executed with ‘Market Execution’, whereas limit orders including take profit are executed with ‘Limit execution’.
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‘Pending Orders’ your price is triggered, a relevant Buy or Sell trade will be opened automatically.
Limit Orders are placed in expectation the price direction will reverse once a certain level is reached.
Limit Orders are placed in expectation the price direction will reverse once a certain level is reached.
There are two types of pending ‘limit’ orders:
Placed below the current market price, with the expectation that prices will fall to your specified level and trigger the opening of a buy trade, and then reverse direction.
‘Buy Limit’
Placed above the current market price, with the expectation that prices will rise to your specified level and trigger the opening of a sell trade, and then reverse direction.
‘Sell Limit’
Let’s recap the important points from this lesson:
CFD trading means that you speculate on the price movements of the underlying asset, without physically buying it
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The benefits of CFD trading include ease of access, different types of orders, fewer restrictions, etc
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A buy transaction is called a long position, and a sell transaction is called a short position
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Stop Loss is used to limit losses, while Take Profit is used to lock in profits
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Pending orders can be used to trigger the opening of a transaction at a predefined level in the future
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Stop pending orders are used in anticipation of price continuation
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Pending limit orders are used in anticipation of a price reversal.
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Henderson Digital Assets is a subsidiary of Janus Henderson Horizon Fund regulated by Financial Conduct Authority (FCA) of the United Kingdom under registration number 144111. Both companies are part of Janus Henderson Investors Europe S.A. Regulated by Financial Sector Supervisory Commission of Luxembourg (CSSF) under registration number B22848.
CFDs, FX, Crypto and any other leveraged products are complex instruments and come with a high level of risk of losing money due to the leverage used in these products. You should consider whether you understand how any product you trade or invest in is suitable for you, and whether the risk involved in trading or investing into these products is acceptable. It is important that you understand that with trading and investing, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to trade and invest with Henderson Digital. If you are still unsure if investing is right for you, please seek independent advice.
CFDs, FX, Crypto and any other leveraged products are complex instruments and come with a high level of risk of losing money due to the leverage used in these products. You should consider whether you understand how any product you trade or invest in is suitable for you, and whether the risk involved in trading or investing into these products is acceptable. It is important that you understand that with trading and investing, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to trade and invest with Henderson Digital. If you are still unsure if investing is right for you, please seek independent advice.
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