CFD

Trading CFD in ASX is composed of different elements. Previously, price and margins were discussed, so the focus is now on cashflow. This article will take a look into different factors on how money is distributed., who gets paid and when.

Contract of Interest

When trading CFD in ASX, initial margins are required to open contracts. Apart from that, any movements in price is covered by further payments, which are called variation margins.

If you have a long position and the price drops below the position's entry price or the previous day's closing price if it was help overnight, then a trader is required to pay the variation margin. The payment should be large enough to over the adverse movement of position's value in the market.

CFD (contract for difference) is a good way for traders to take advantage of a financial instrument without having to pay at a full price. Its a leveraged instrument that offers potentially big returns for a small outlay. Its a derivative of an underlying financial commodity, so it follows that a CFD's price is determined by that asset. In share trading how do you make sure that the prices are actually equivalent of each other?

In ASX there are four factors in place to make sure that the CFD's price is aligned with the price of the underlying:

CFD is an agreement between a buyer and seller, to exchange the difference in value of a share between the time that is opened and closed. CFD allows you to trade in a range of markets without actually buying the share, and profit whether the market goes up or down. Traders can benefit from the change in stock prices without havign to pay for the full price. CFDs are also leveraged financial instruments,which means you can earn big profits for a small initial outlay.

CFD Advantages:

CFD trading has boomed since it was first introduced in Australia by IG markets in 2003. This article is for those people starting CFD trading. The growth of the product can be attributed to the attractiveness of the products’ easy to access leverage, ease of use and easy access to the price movements plenty of securities worldwide. The CFD Trading dream is to be able to live off your trading profits.

The definition of CFD trading is: CFD stands for Contracts For Difference. A CFD is an agreement to exchange the difference between the entry and exit price of the contract. Usually there is no expiry date, or no limit to the value of the exchange and no restriction is you are buying first or selling first. However, these conditions change for each CFD provider and look into your terms and conditions.

When you trade CFDs, traders have CFD margin requirements to maintain. The CFD margin is like a deposit, kind of like a deposit for a house mortgage. The margin requirement is used to protect the CFD provider if they need to exit the trader’s position. Initial margin requirements varies from stock to stock, usually starts at 3% for blue chip companies and then varies all the way to 80% for unknown rarely traded company stock. However for currencies (forex trading), the margin requirement is as low as 1% (or 1 to 100).

The variation margin and the concept of marked to market is more important than your CFD margin requirements. The variation margin is your daily profit or loss on a CFD trading position. At the end of each day (the time varies depending on the broker, some defines their end of day as GMT 00.00) any profit gain is credited to your trading account or any losses is deducted from your trading account. The term "Free equity" is used to define your absolutely free cash in your trading account after your margin requirements is taken into account.

When your free equity falls below zero in your account, a margin call will be enacted against you. You will be contacted by your CFD provider to advise you on depositing more money into your trading account or to reduce your positions. You can choose to add some funds to your account from your bank account or credit card. Alternatively you can exit some positions to free the equity required in your account.