What is a Contract for Difference?
A Contract for Difference (CFD) is a financial derivative that enables traders to speculate on the price movements of various underlying assets, including forex pairs, shares, commodities, indices, and cryptocurrencies.
When trading a CFD, you enter into an agreement with your broker to exchange the difference in the value of the underlying asset between the time the contract is opened and closed.
Unlike traditional investing, trading CFDs do not involve owning the underlying asset or physically exchanging currencies. Instead, you either make a profit or incur a loss based on the asset's price movement.
Trading Strategies with CFDs
CFDs offer traders the flexibility to take advantage of market movements by going long (buying) to profit from rising markets or going short (selling) to profit from falling markets.
Long Position (Buy)
If you expect the price of an underlying asset to rise, you can open a long (buy) CFD position with the aim of closing it at a higher price. Your position will be profitable if the asset’s price increases, but you will incur a loss if the price moves against you.
Short Position (Sell)
Conversely, if you believe that the price of an underlying asset will decline, you can open a short (sell) CFD position with the intention of buying it back at a lower price. In this case, your position will be profitable if the asset’s price falls. However, if the price rises, you may incur a loss.
What Can You Trade with CFDs?
With CFDs, you have access to a wide range of markets, allowing you to diversify your trading portfolio. On Mitrade’s platform, you can trade:
• Forex (FX): Major currency pairs like EUR/USD, GBP/USD, USD/JPY, minor pairs and more.
• Shares: Individual stocks such as Apple (AAPL), Amazon (AMZN), and Tesla (TSLA).
• Indices: Popular indices like the Nasdaq 100, S&P 500 (SPY), and FTSE 100.
• Commodities: Key commodities such as Gold (XAU/USD), Silver (XAG/USD), and Crude Oil (WTI).
• Cryptocurrencies: Major cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP).
• ETFs: Popular exchange-traded funds like Invesco QQQ Trust Series 1 (QQQ), iShares Russell 2000 ETF (IWM), Vanguard Total Stock Market Index ETF (VTI).
This variety allows you to capitalize on different market trends and conditions.
What is the Duration of a CFD Contract?
CFDs typically do not have a fixed contract duration. They are open-ended, meaning a position remains active until the trader decides to close it, either by selling a long position or buying back a short position.
Traders should note that margin requirements must be maintained throughout the trade to avoid margin close-outs, and that holding a position overnight will incur an overnight fee. Additionally, it is important to review the specific terms of each contract, as some CFDs—such as those linked to futures—may have an expiration date or other conditions set by the broker.
Leverage
Trading CFDs involves the use of leverage, which allows trades to open larger positions with a smaller amount of capital. In other words, you only need to deposit a fraction of the total trade value, with the rest borrowed from your broker. This practice is also known as trading on margin, which enabbles traders to increase their exposures, thereby magnifying both gains and losses.
For example, with $500 in capital and 1:20 leverage, you can control a position worth $10,000. If the leverage is reduced to 1:10, you would need $1,000 in available capital to control the same $10,000 position.
Margin Requirements
What is Margin?
Margin is the amount of capital a trader should have available to open and maintain CFD positions. It serves as collateral to cover potential losses and is expressed as a percentage of the trade’s notional value. There are two types of margins you need to be aware of:
1. Initial Margin - This is the amount required to open a CFD position, typically expressed as a percentage of the instrument’s notional value. For example, if the initial margin requirement is 5% , you will need $100 to control a $2,000 position at 1:20 leverage.
2. Maintenance Margin - This is the minimum amount of equity you must maintain in your account to keep your positions open. It is typically set at 50% of the initial margin required for each instrument; for example, if the initial margin for a trade is 5%, your account equity should remain above 2.5% of the trade’s initial value to keep the position open and avoid a margin close-out.
Let’s say you have two open positions in your account, each requiring an initial margin of $500, for a total initial margin of $1,000. The maintenance margin for each position is $250, so the total maintenance margin is $500. As the market moves, your equity fluctuates. As long as it stays above the total maintenance margin of $500, your trades will remain active. However, if your equity falls to or below this threshold, your positions would be liquidated to prevent further losses.
What is Margin Close-Out?
A margin close-out occurs when your account equity drops to or below the required maintenance margin level due to unfavourable market movements. In this case, the platform automatically closes one or more open positions to restore the account to the required margin level and prevent further losses.
Risk Management Tips
• Use Stop Loss Orders: Stop Loss Orders automatically close your positions when the price reaches a specified level, helping to limit potential losses.
• Stay Informed: Monitor market movements and your positions to react quickly when conditions change.
• Know Your Limits: Understand the risks of leverage. Only trade with capital you can afford to lose, and avoid over-leveraging, as it can lead to substantial losses.
Spreads, Commissions and Overnight Fees
Explanation of Bid and Ask Prices and Spread
In trading, the bid price and ask price represent the best prices that buyers and sellers are willing to transact at.
• Bid Price: This is the highest price a buyer is ready to pay for a financial instrument.
• Ask Price: This is the lowest price a seller is willing to accept.
The difference between these two prices is known as the bid-ask spread.
Fees and Charges
Mitrade does not charge any fees beyond the buy-sell spreads and overnight fees. Our primary compensation comes from the market spread.
Overnight Fees
An overnight fee is incurred when a position is kept overnight, reflecting the cost of financing your position. The overnight fees are charged when a positions is kept after 21:59 (UK time).