What is a CFD A contract for difference (CFD) is a popular form of derivative trading. CFD trading enables you to speculate on the rising or falling

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1 What is a CFD A contract for difference (CFD) is a popular form of derivative trading. CFD trading enables you to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies and treasuries.

2 When you trade CFDs, you take a position on the change in value of the underlying asset over time. You are essentially betting on whether the value of an underlying asset is going to rise or fall in the future compared to what it was when the contract was taken out (or executed).

3 A CFD is a leveraged derivative financial product CFDs allow you to bet on rises and falls in shares, currency and other assets while only putting up a small amount of your own money. With CFDs, you only have to put in a fraction of the market value of the underlying asset when making a trade, sometimes as little as 1%. The remaining 99% of the value of the asset is covered by the CFD provider. Even though you only put up 1% of the value, you are entitled to the same gains or losses as if you had paid 100%.

4 How is trading CFDs different to investing in shares Unlike investing in shares, when you trade CFDs, you are not buying or trading the underlying asset. What you are buying is a contract between yourself and the CFD provider. While the value of the CFD is derived from the value of the underlying asset, it may not track it exactly. These small differences can significantly affect any gains or losses you make.

5 What is the underlying asset When you buy or sell a CFD, you are making an agreement to trade the difference in the value of an underlying asset (sometimes called the underlying security or the reference asset ) between now and a future date. But you are not actually trading the underlying asset itself. CFD providers allow you to buy or sell CFDs on a range of underlying assets. Shares are the most common underlying asset. But most CFD providers also allow you to trade CFDs on other underlying assets, such as commodities and foreign exchange.

6 How to trade CFDs The following five steps provide a brief overview of CFD trading: 1. Choose the financial instrument Choose the instrument, such as EUR/USD or any others that you want to trade on. CFDs offers across a wide range of global markets, including forex, indices, commodities, shares and treasuries. 2. Choose to buy or sell Buy (go long) if you think prices will rise, or sell (go short) if you think prices will go down. 3. Enter a trade size Decide on how many units you want to trade. The value of one CFD unit can vary depending on the instrument you ve chosen to trade.

7 4. Manage your risk Select from a range of stop-loss orders, including guaranteed stop-loss orders (GSLOs). 5. Monitor your position After placing your trade, monitor your open positions (including any stop orders or take-profit orders) to follow your real-time profit or loss. Please remember that losses can exceed your deposits. 6. Close your position If your trade is not automatically closed out as a result of a stop or take-profit order being triggered, close your trade when you are ready.

8 Example of a CFD trade PR has been doing some research on X Pvt Ltd and thinks that its share price is undervalued. He decides to take a long position on CFDs over X shares. The current price of a CFD over X shares offered by the CFD provider is $5. PR logs into his CFD trading account and places an order to buy 4,000 X CFDs. His order is accepted by the CFD provider at $5 per CFD. The total contract value is $5 x 4,000 = $20,000.

9 The CFD provider requires a 5%(for ex.) margin to open a trade, which is deducted from PR CFD trading account. The margin is equal to $20,000 x 5% = $1,000. The provider also charges PR a commission of X% of the contract value, which is $X on this trade. Any gains PR makes on this trade are also dependent on the CFD provider being willing to accept his trades and meeting all their obligations to him. This includes crediting any gains to his CFD trading account after the closing of a position and transferring them to his bank account on request.

10 How the price of Beta shares affects PR return If the price of X shares to PR would gain/lose Rises by 20% $6.00 $3, Rises by 10% $5.50 $1, Rises by 5% $5.25 $ Rises by 2% $5.10 $ Stays the same $5.00 -$XX.XX Falls by 2% $4.90 -$ Falls by 5% $4.75 -$ Falls by 10% $ $2, Falls by 20% $4.00 -$4,054.00

11 Example of another CFD trade Buying a company share in a rising market (going long) Company X is trading at 98 / 100 (where $98 is the sell price and $100 is the buy price). The spread is 2. You think the company s price is going to go up so you decide to open a long position by buying 10,000 CFDs, or units at $100. Company X has a margin rate of 3%(ex.) which means you only have to deposit 3% of the total value of the trade as position margin. Therefore, in this example your position margin will be $300 (10,000 units x $100 = $10,000 x 3%).

12 Outcome A: a profitable trade Let's assume your prediction was correct and the price rises over the next week to $110 / 112. You decide to close your buy trade by selling at $110 (the current sell price). The price has moved $10 in your favour, from $100 (the initial buy price or opening price) to $110 (the current sell price or closing price). Multiply this by the number of units you bought to calculate your profit. AND THE SAME WAY LOSING TRADE ALSO CAB BE CALCULATED