Contracts for difference correspond to a form of trading that is used to designate leveraged products. It is based on the difference in the price of an asset between the time you open a position and the time you close.
In other words, for you, it is a matter of anticipating the value of an asset in the future and taking a position on its rise or fall. Although CFDs offer very attractive returns, potential losses must be taken into account since they can exceed your deposits. It is therefore strongly recommended to have excellent knowledge of risk management before embarking on this type of product. Currently, a drop in brokerage fees, linked to strong competition from online brokers, makes it a technique that can prove interesting but, remember, risky. Going into it blindly represents an unnecessary risk, which could lead to the loss of your often hard-saved capital.
A CFD or a contract for difference what are the ins and outs
The CFD surfs or speculates on the rise or fall in the prices of international financial markets (or products) displaying high volatility such as stocks, indices, commodities, currencies, and bonds… This is a contract between a client (individual or company) and a broker/banker but does not require the client to own the stock as it is. is the case for traditional stocks.
CFDs are margin products. As a result, you may only deposit a percentage, even a small one, of the total transaction value to open a position. This margin trading has the corollary of increasing your potential gains, but on the contrary, a possible increase in your losses because they are based on the total value of the position, you can therefore lose more than the capital invested.
You should know that the risk of loss is high if you make the wrong choice to bet on the decline of a stock while it is rising. But the most serious thing is that this loss can even exceed the initial investment due to margin calls. Also, intermediaries recommend the use of “guaranteed stop” orders even if they cost more. However, you should frequently monitor the evolution of your positions, and using specialized brokers such as IG is not a luxury.
The broker’s obligations
Leverage allows traders to invest more than they have in their accounts. All brokers regulated in France have the following warning: “The CFD order execution service presents a high risk and may result in losses exceeding your initial investment. CFD trading is not suitable for every type of client. Please ensure that you are fully aware of the risks inherent in this type of operation. »
Creating a specific account
If you wish to use this technique, please note that to access CFDs, you must open a specific account with one of the specialized issuers such as Igm Markets, X Trade Broker, CMC Markets, Saxo Banque, or with online brokers such as Fortuneo, Bourse Direct, Financeli, Cortal Consors B, Capital… which are partners and use their technological platforms. However, each manages its prices and conditions in terms of the financial strength of the investor.
An imperative to know the customer service of brokers and banks
Excellent customer support remains a prerequisite for security. You need to be able to contact them and get the right help when you need it. Some companies offer 24/7 customer service that allows you to contact the broker either by chat or by phone.
What are the costs associated with trading CFDs
The spread: The spread corresponds to the difference between the buying price and the selling price.
Funding fees: at the end of each trading day (5:00 p.m. New York time), any position held on the account may be subject to a fee called “financing costs”, which can be positive or negative.
Fees for access to market data: to know the price data for stock CFDs, you must activate the corresponding market data, for which a fee is charged.
Attention! The use of leverage is not free if the position exceeds more than one day. For each additional day, interest must be paid. Consequently, it remains essential to know the rates applied by the financial intermediary to clearly understand the real cost of such an operation. Take into account that you must repay all amounts incurred even if you make a loss. Engage with great caution.
