INTRODUCTION TO CFDs

Size: px

Start display at page:

Download "INTRODUCTION TO CFDs"

Jerome Sims
6 years ago
Views:

2 What we ll cover: - Understanding what a CFD is. - Advantages of Forex CFDs and how they can magnify potential profits. LET S GET GOING. CFD STANDS FOR CONTRACT FOR DIFFERENCE. CFDS ARE A FLEXIBLE ALTERNATIVE TO TRADITIONAL TRADING AND CAN BE USED TO TRADE FOREX, SHARES, COMMODITIES AND INDICES. 2

3 2.1 INTRODUCTION TO CFDS In this module we ll unpack what CFD trading is with regards to Forex. However, as you go move through this module, please keep in mind that: Any advantages of CFDs will also apply to share, index and commodity CFDs. There is a wide range of share, commodity and index CFDs that are at your disposal on our platform. We ll also take a quick look at the different types of CFDs that you can trade on our platform. Before we delve deeper into what CFDs are, we should probably establish a working definition. DEFINITION: CFDs are derivative products that are traded on margin which means that a trader can use leverage, i.e. take an underlying position that is a multiple of his available funds. CFDs are also bi-directional, meaning they allow you to trade on whether you think the price of a financial asset will go up or down. THIS GUIDE COVERS CFDS WITH REGARDS TO THE OTHER FINANCIAL ASSETS: SHARES, COMMODITIES AND INDICES. Does this sound like Chinese? Don t worry. We re about to break it down. 3

4 2.2 DERIVATIVE A CFD is a derivative product : This means is that its value is based on the value of another underlying asset. The underlying asset could be shares, forex or commodities such as gold or oil. The most important things to remember with CFDs are: You never actually own the underlying asset. There is no physical purchase involved in CFD trading. Because CFDs exclude the requirements that come with the acquisition of the assets they simplify the process of trading. You own a contract that allows you to trade on the value of the underlying asset, and still benefit if the market moves in your favour. As a rule, CFD prices generally correspond to the underlying asset price. For example if the price of brent crude oil (BRNT) is $36.50 a barrel, the CFD price will more or less be $36.50 a barrel as well. YOU NEVER ACTUALLY OWN THE UNDERLYING ASSET. THERE IS NO PHYSICAL PURCHASE INVOLVED IN CFD TRADING. AS A RULE, CFD prices generally correspond to the underlying asset price. FOR EXAMPLE: If the price of brent crude oil (BRNT) is $36.50 a barrel, the CFD price will more or less be $36.50 a barrel as well. 4

5 2.3 LEVERAGE CFDs are leveraged products : this refers to the ability to use a small deposit to trade a much larger position. We have all used leverage, to varying degrees, in our lives, for example, when you take out a mortgage to buy a house, the bank may require a small deposit in order to give you access to a much larger bond amount. In this case, you are using a small amount of cash to control a larger asset. The most important things to remember with regards to leverage are: $ 100,000 Leverage is usually described in the form of a ratio e.g. 1:100 Leverage Using the above leverage of 1:100 a trader can trade up to R100, with only just having to put down R Leverage can magnify your profits, but it can also magnify your losses as you can stand to gain or lose quantities that are much larger than your account balance. Every broker will offer different levels of leverage. The default leverage on our platform is 1:500, which means you can take a $500 position with as little as $1. You can change your leverage and opt for lower leverage. THE POWER OF LEVRAGE THE LEVER $ 1000 LEVERAGE CAN MAGNIFY YOUR PROFITS, BUT IT CAN ALSO MAGNIFY YOUR LOSSES AS YOU CAN STAND TO GAIN OR LOSE QUANTITIES THAT ARE MUCH LARGER THAN YOUR ACCOUNT BALANCE. Leverage 5

6 2.4 MARGIN When using leverage, the term margin is used to refer to the small deposit that a trader needs to put down in order to take a much larger position. In order to take a $100, position, a trader would need to put down $ Margin is usually stated as a percentage or referred to as margin rate. It isn t a fee or a transaction cost but a tool that can magnify your gains. LEVERAGE AMOUNT TRADED REQUIRED MARGIN REQUIRED MARGIN (%) 1:1 $ $100, % 1:2 $ $50,000 50% 1:50 $ $2,000 2% 1:100 $ $1,000 1% 1:200 $ $ % 1:400 $ $ % The ability to trade on margin is one of the biggest advantages of CFD trading. Let s take a look at an example: E XAMPLE Lets say you want to take a long position of 2 mini lots of USD/ZAR. The exchange rate is currently at You choose a leverage of 1:100 = required margin of 1% 1. Calculate the value of position in USD 2 mini lots = 2 $10,000 = $20,000 (since you are buying 2 mini lots of USD) 2. Calculate margin 0.01 margin x $20,000 = $200 USD A margin of only $200 is required to hold a long position of $20,000. 6

7 AS YOU CAN SEE, LEVERAGE AND MARGIN CAN BE VERY PROFITABLE IF USED CORRECTLY AND ARE IMPORTANT ASPECTS OF TRADING CFDS. CONCEPT CHECK: Trader Joe wants to take a position worth $55,000. His broker can only offer a 10% margin rate. What is the required margin amount? What is the amount of leverage expressed as a ratio? TRADING DISCIPLINE IS VERY IMPORTANT. It s easy to wipe out your entire trading account if you do not manage leverage well. The potential risk of losing more than you have in your trading account is a very real risk of trading CFDs. In our Risk Management module we ll cover a few risk management techniques you can use to minimise risk. 7

8 2.5 BI-DIRECTIONAL (ABILITY TO SHORT-SELL) As a CFD trader you can profit when the price of an instrument (currency, share, index, and commodity) is rising or falling - this is one of the biggest advantages of trading CFDs. In the first module we illustrated how you can make money when a price is rising by buying low and selling high. This is called going long. Not making sense? training@uprise.com for more info about going long. How short-selling works Broker Short Seller Market ESSENTIALLY, YOU ARE BORROWING FROM YOUR BROKER BY SELLING AN ASSET YOU DON T OWN AND THEN BUYING IT WHEN ITS PRICE IS LOW AND RETURNING IT TO YOUR BROKER, MAKING A PROFIT FROM THE DROP IN PRICE. This is commonly referred to as short-selling. The below example uses shares/stocks to illustrate how short selling is provided by a broker but works the same why for all the other types of CFDs. 8

9 YOU CAN SHORT-SELL CFDS JUST AS EASILY AS YOU CAN BUY THEM. If you think the price of something is going to fall: i) Log onto your trading platform, ii) Open a trade, iii) Click sell instead of buy, iv) If the price does fall, lock in your profits by closing the trade (buying back). E XAMPLE You believe the share price of a listed company will drop. You can open a sell trade on the platform. Lonmin shares are currently trading at R11.75 per share. 1. Borrow shares from broker You decide to short-sell 1000 shares totalling R11,750. Shortly afterwards, a negative report on global commodities is released and Lonmin s share price falls to R You can now buy back the 1000 shares for R10, Return shares to broker You bought back the 1000 shares for R10,750.And can now return the 1000 shares to the broker 3. Keep the profit You retain the difference = R11,750 - R10,750 = R1000 9

10 2.6 TRADING CFDS WITH UPRISE MARKETS Uprise Markets offers a wide range of forex, share, commodity and index CFDs that are available to you on our trading platform. However, not all instruments are suitable for every trader, so it is important to only trade instruments that you understand and are comfortable with. We ve already covered Forex, so we ve included a brief summary of the other types of instruments available. COMMODITIES Commodity CFDs are best for traders who are interested in taking advantage of changes in the supply and demand of the natural resources that drive the global economy. Do you have a grip on what will happen to platinum or crude oil prices? These could be the CFDs for you. ON OUR PLATFORM YOU WILL BE ABLE TO TRADE KEY COMMODITIES SUCH AS OIL, COFFEE AND GOLD. 10

11 HERE ARE SOME OF THE COMMODITIES YOU COULD TRADE ON: SYMBOL DESCRIPTION EXCHANGE STANDARD CONTRACT QUOTED UNITS AGRIC COCOA COCOA NYSE:ICE 10 metric tons USD/ton COFFE COFFEE NYSE:ICE 37,500 lbs USD/lbs CORN CORN CME 5,000 bushels USD/bushel COTT2 COTTON #2 NYSE:ICE 50,000 lbs USD/lbs ORANG ORANGE JUICE NYSE:ICE 15,000 lbs USD SBEAN SOY BEANS CME 5,000 bushels USD/bushel SUG11 SUGAR #11 NYSE:ICE 112,000 lbs USD cents/lbs WHEAT WHEAT CME 5,000 bushels USD/bushel ENERGY BRNT BRENT CRUDE OIL ICE 1 LOT = 1000 Barrels USD/barrel CL LIGHT SWEET CRUDE OIL CME 1 LOT = 1000 Barrels USD/barrel NGAS NATURAL GAS CME 10,000 mmbtu USD/mmBtu RBOB RBOB GASOLINE CME 1 LOT = 42,000 Gallons USD/gallon METALS XAGUSD SILVER/USD 1 LOT = 5000 OUNCES USD/oz. XAUUSD GOLD/USD 1 LOT = 100 OUNCES USD/oz. PALLAD PALLADIUM CME 1 LOT = 100 OUNCES USD/oz. PLAT PLATINUM CME 1 LOT = 100 OUNCES USD/oz. COPP COPPER CME 25,000 lbs USD/lbs Some of the commodities available on our platform 11

12 SHARES Share CFDs are best suited for traders who are interested in trading global stocks or those with their eye on a particular global giant. Access almost 80 global shares listed on some of the world s most prominent stock exchanges. SOME OF THE GLOBAL SHARES ON OUR PLATFORM 3M BMW DTELE IBM SIEMENS AIG BOA EBAY INTEL SONY ALCOA BOEING ENI INTEX TELFON ALLI BPOMIL EOAN JNJ TELITA AMAZON BSANMD EXXON KING TESLA AMEX CAT FACEBOOK LVMH TEVA APPLE CHEVRON FIAT MCDONALDS TOTAL ATT CHMO FRTELE METRO TOYOTA ALIBABA CISCO GE MORGAN STANLEY TWITTER BP CITI GM MICROSOFT UBS BAIDU COCA COLA GOLDMANSACHS NOKIA VERIFON BARCLAYS COMMBK GOOGLE PFIZER VODAFONE BAYER DIAM HPACK PG VOWGEN BBVA DBFRA HSBC POTASH WMART BERKSHIRE DISNEY IBER REPSOL YAHOO 12

13 YOU LL ALSO HAVE ACCESS TO A NUMBER OF LOCAL SHARE CFDS GIVING YOU ACCESS TO JSE LISTED COMPANIES. SOME OF THE LOCAL SHARES ON OUR PLATFORM ABSA GROWTH POINT OLD MUTUAL ANGLO PLATINUM IMPALA PLATINUM REMGRO LIMITED ANGLOAMERICAN IMPERIAL RICHEMONT ANGLOGOLD ASHANTI INTU RMB ARM INVESTEC LIMITED SAB MILLER ASPEN INVESTEC PLC SANLAM ASSORE KUMBA IRON ORE SASOL BHPBILLITON MASSMART SHOPRITE&CHECKERS BIDVEST MEDICLINIC STANDARD BANK BAT MONDI LTD STEINHOFF DISCOVER HEALTH MONDI PLC TIGER BRANDS EXXARO MTN TRUWORTHS FIRST RAND NASPERS VODACOM GOLD FIELDS NEDBANK WOOLWORTHS 13

14 INDICES For some, trading a single stock is not that interesting or the stock price movement may not vary enough to offer enough opportunities to trade. For traders who prefer broader regional or sector market movements instead of just one particular stock, Index CFDs might be a more suitable instrument. Our platform offers access to all major financial indexes. Here s a list of some of them: SYMBOL CAC DAX DOW FTSE NK NSDQ SP DESCRIPTION CAC 40 DAX 30 MINI SIZE DOW JONES FTSE 100 NIKKEI 225 NASDAQ 100 E-MINI S&P 500 EXCHANGE EURONEXT EUREX CME ICE CME CME CME $IND ASX DJEXX HHI US$ FUTURE INDEX ASX SPI 200 DJ EURO STOXX 50 CHINA H-SHARES ICE ASX EUREX HKE H.S.I HANG SENG 40 HKE IBEX IBEX 35 BOLSA DE MADRID JSE FTSE/JSE SAFEX MIB NIFTY FTSE/MIB CNX NIFTY BORSA ITALIA NSE VIX VOLATILITY SP500 CBOE CONTRACT 1 LOT = 10 UNITS 1 LOT = 10 UNITS 1 LOT = 10 UNITS 1 LOT = 10 UNITS 1 LOT = 10 UNITS UNIT QUOTE EUR EUR USD GBP USD USD USD USD AUD EUR HKD HKD EUR ZAR EUR INR USD 14

15 2.7 RECAP OF THE ADVANTAGES OF TRADING CFDS Trading on any market direction: One of the biggest advantages of CFDs is that you can trade in any direction. You can open both long and short positions. Lower transaction costs: The costs involved in CFD trading are much lower compared to trading actual underlying assets. CFD trading transaction costs are determined by the spread charged by the broker. This will vary with each broker. Leverage: Traders have the ability to take large positions by using leverage and can therefore increase potential returns. No Expiry: A CFD continues indefinitely unlike other financial assets that may expire monthly or quarterly and then be re-entered into with additional costs. TRADING ON ANY MARKET DIRECTION LOWER TRANSACTION COSTS LEVERAGE NO EXPIRY 15

16 YOU HAVE REACHED THE END OF THE SECOND MODULE. C ONGRATULATIONS!

2017 Future Expiration

2017 Future Expiration Tradable 03-12-2018 04-03-2018 03-06-2018 09-09-2018 E-Mini Nasdaq 100 CME Equity NSDQ-Date Tradable 03-12-2018 04-03-2018 03-06-2018 09-09-2018 Mini-Size Dow CME Equity DOW-Date Tradable 03-12-2018 04-03-2018