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Introduction Chapter 1: HE BASICS YOU SHOULD KNOW ABOU CFD RADING
Chapter 2: CHOOSE YOUR CFD PROVIDER
Chapter 3: RADING IN ACION
Chapter 4: CONSIDER AND MANAGE YOUR RISKS
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INRODUCION
Nowadays, we live in a constantly changing and developing world. Te present lie is so dynamic that today’s innovation becomes yesterday’s history. Under such conditions every modern person searches or new solutions and technologies. Te emergence o Internet connection has expanded human’s opportunities in career development. Literally everything can be done online now. Do you want to get a medical consultation? You can get it easily just sitting at home in ront o your computer. Do you want to watch films? You can do it without going to any cinema. Do you want to buy something rom abroad? No need to go to that country just to get the item, simple online payment, and the item will visit your living place. Likewise, financial markets are now available via simple Internet connection. For investors who are involved in Stock trading, held in a centralized place, and who are looking or more efficient trading instruments, will appreciate considerable advantages o CFD trading, a trading instrument, developed not so long ago. In this tutorial you will find all main principles o CFD trading, which will contribute to your better understanding o this innovative market and to more successul trading. Welcome to the world o CFD market!
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CHAPER 1 HE BASICS YOU SHOULD KNOW ABOU CFD RADING
History of CFDs CFDs are relatively new trading instruments. Te history o CFD trading goes back to the early 1990s. We can explore the origination o other financial products, like utures (in 1730s), options (in 1973), etc. to make sure that CFDs are innovative instruments. Because o human being searching or new opportunities and solutions all the time, it is quite predictable that these new instruments would have arisen a great interest in the financial market. Due to a range o ad vantages that you can enjoy while trading CFDs, they are gradually becoming more and more popular. Nowadays, we come across with more and more people, trying themselves in CFD trading. Every year new CFD books and tutorials are being published, new seminars and trainings are being organized, thus rising people’s competence about this financial product. CFDs were originated by a London derivative brokerage firm called Smith New Court which was later bought out by Merrill Lynch. Brian Keelan and Jon Wood played a great role in the invention o CFDs. So why did appear the necessity to invent CFDs? Clients o New Court wanted to hedge their stock positions on the London Stock Exchange, and CFDs were perect tools to do it by going short, as well as getting an opportunity to trade on margin. Apart rom that, CFDs were a way to avoid stamp duty which is an added bonus. Later on, CFDs stopped being used only by hedge unds and became widespread among retailers. Te first CFD provider company was GNI, who launched GNI ouch online trading system. By using this system, the trader had a direct access to the London Stock Exchange, www.ifcmarkets.com
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getting an opportunity to see live quotes o each asset. Starting rom 2002, other countries o the world also opened their doors to this new instrument. Te first country to do it was Australia. Since then, CFD trading has become more and more popular, spreading roots in Germany, France, Norway, Italy, Singapore, etc.. Nowadays, the number o people, interested in this kind o trading, are considerably increasing. Te volume o CFD trades is estimated about 25-30% o daily equity trades in the London Stock Exchange and 10-15% o the total transactions in the Australian Stock Exchange. Te increase o CFD traders is directly proportional to the increase o CFD providers. So, newer and newer CFD providers are appearing in the world, offering different services to their clients.
What is CFD? What are the Advantages of CFD Trading?
I you have an intention to improve your skills in financial markets and you are exploring new spheres to try your hand at them, it is worth studying CFD trading and trying yoursel in it. So, let us see what the essence o this trading is. CFD (Contract or Difference) is a derivative financial product, since it derives its value rom another financial asset. CFDs allow you trading on prices, moving up or moving down, without physically possessing the underlying asset. Generally the underlying assets o CFD are indices, commodities and stocks. According to the traditional definition, CFD is a contract between two parties, a buyer and a seller. I the difference between the asset open price and its price at the moment o closing the contract is positive, the seller pays to the buyer and, just on the contrary, i that difference is negative, the buyer pays to the seller. In act, CFD trading is perormed the same way as Forex trading. You trade in two directions, i.e. you buy the contract, expecting its price to go up in order to sell it later with higher price and vice versa, you sell the contract, expecting its price to all in order to buy it later with a lower price. In both cases you pursue only one purpose - to get a profit. I you all short o expectations, your trading completes with losses. Tere are numerous advantages o CFD trading, compared to trading in the Stock Exchange. CFD trading is much cheaper and convenient because as investors do not actually own the underlying instruments, they do not have to pay a stamp duty, which is 0.5% on the value o each trade. In the United Kingdom, investors Click here to share
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have to pay this amount or rolling over their short position, which turns out to be quiet expensive. In CFD trading there are commissions or stock trading, but they are much lower than in the stock market. In contrast to trading on the Stock Exchange, where investors could have positions only in buy direction, in CFD trading they can open both long and short positions. It is worthy to note that trading in CFD market is possible with higher leverage, which lets investors to open positions o higher volumes. In IFC Markets leverage or trading instruments is up to 1:400. Only or Stock CFDs the maximum leverage is 1:40. Another important eature that makes CFD trading so attractive is the actor o diversity o the markets. IFC Markets allows traders trading CFDs along with currencies rom a single account, which is very convenient or the investors.
What is an underlying asset? Stock, Index and Commodity CFDs
I you have decided to trade a CFD, you are supposed to make an agreement to trade the price difference o the underlying asset between the current and uture prices. Underlying asset is a term o derivative trading. As already has been mentioned, CFDs are derivatives, the prices o which are derived rom underlying assets. Various products can serve as underlying assets. CFD traders are involved in trading stocks, indices and commodities. So, the underlying assets o these instruments may be shares o a company, products rom different sectors, like agriculture, energy, and others. Tus, the CFD derives its price rom that underlying asset and as that concrete instrument price changes, your CFD price changes simulteanously. Actually, by becoming a CFD trader, you get a wide access to the world’s largest and diverse markets. Are you interested in shares o U.S. companies? You have a real opportunity to enjoy trading such popular stocks, as Google (#S-GOOG), Facebook (#S-FB), Apple Inc (#S-AAPL), Microsof Corporation (#S-MSF), etc. You are ree to trade stocks rom various markets with IFC Markets. Tere are companies that are specialized on one or two markets, while IFC Markets offers stocks rom the U.S., German, British, Russian, Chinese and Japanese markets. Indexes are also widespread underlying assets in CFD market. ‘’What is an index?’’ You may ask. It measures the price change o a particular number o stocks o a particular country. o make it more precise, let us suppose that we want to measure the price change o U.S. stock market. For example, we find 500 best opwww.ifcmarkets.com
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erating companies in the USA, study stock prices o those companies and make a stock index. One o the most popular stock indexes is SnP500 or Standard & Poor’s 500, an index, based on 500 most widely stocks in NYSE (New York Stock Exchange). Another popular index is CAC 40, tracking 40 largest French stocks, or DAX 30, representing 30 largest stocks in Germany. Indexes are usually quoted against the currency o the country to which they belong. For example, CAC 40, being an index o French stock market, is quoted against Euro. So, Index CFDs will allow you speculating on price changes o a number o stocks, creating some good trading opportunities or you. ‘’And what i I want to trade commodities?’’ One may ask. You may trade commodity CFDs too. As mentioned above the underlying assets are rom various sectors such as agriculture, energy and metals. In addition, traders can trade CFDs on commodity utures that include such instruments as Copper, Natural Gas, Brent Oil, Heating Oil, Sugar, Cocoa, and many more. IFC Markets offers trading commodity and index CFDs without any expiration date; that is why they are called continuous. CFDs on commodity utures are provided with expiration dates. Leverage or trading all types o CFDs except or stocks is up to 1:400 with IFC Markets. For Stock CFDs it is up to 1:40.
What is attractive in CFD market? Te growing interest towards this financial product is the best evidence o its attractiveness. But what makes it so attractive? One may ask why to trade a CFD i I can trade the instruments I like on a traditional Stock Exchange. Actually, there are a wide range o differences between them, due to which many traders have already passed to CFD trading. Let us see the main differences: •
Leverage I you track the price movement o a CFD with that o a common underlying asset, you will see that the CFD moves the same direction as the physical asset itsel. Te price o CFD repeats the price dynamics o the underlying asset. Ten why do most people preer trading CFDs? Tere is not a single reason, one o them is the advantage o leverage, due to
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which you enhance your potential returns. In Stock Exchange i, or example, the Apple stock’s price is $500, you should pay the whole sum in order to enter the market. Te conditions are different in CFD market. Here you need to pay only a small percentage o your trading capital. Tis percentage differs, depending on the instrument type and the CFD provider. Some offer 1% margin, others 5%-10%. However, leverage is a tool magniying both your profits and losses. Being an advantage in one case, it may become a disadvantage in another case. Let us take that we want to buy the SP500 index with the price o $2000 and the margin o 10%. Tis means that we pay only $200 o the actual price o the index. Te index rises in price reaching $2050, thus making your profit equal to $50. Now imagine that the index decreases in price, reaching $1950. In this case you lose 25% o your investment that is quite high taking into consideration that you had only $200 in vestment and that you lose 25% only on one position. So, be quite careul while using leverage. rade on both rising and falling markets Any CFD trader can get an opportunity to make a profit regardless o the market direction. What does it mean? Tis means that both rising and alling markets can equally bring you gains, as you trade the price movement o a trading instrument, without owning the physical stock. No Underlying Ownership raders o not own the underlying indices, commodities or stocks which means that they do not carry risk o having to take ownership o the underlying physical instrument. Low commissions CFD trading is much beneficial in terms o low commissions than trading directly at an Exchange.
Additionally, there are advantages or Stock CFD trading, compared to trading stocks at a Stock Exchange: •
Access to international markets I you wish to trade American stocks, being in Australia at the moment, you do not need to change your location. You can enjoy various opportunities o American, Asian, Australian and European stocks. What you
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need to do is just to choose a CFD provider, open an account and start trading. No stamp duty Unlike traditional trading in a Stock Exchange, CFD trading does not require paying any stamp duty. It is quite logical as you do not own that Stock. Accordingly, you do not have any shareholder voting rights. Dividend payment Like stock providers, CFD providers also pay dividends to traders on long positions. So, dividend adjustment is credited to the client’s account in case o going long, and is debited rom his account in case o going short. IFC Markets offers special beneficial conditions or trading CFDs on indices and commodities without any expiration date. Tis means that you can keep your positions open as long as you wish. No limitation, no restriction. Tis eature is offered by a ew companies and is very attractive or investors, since they do not need to worry about their open positions or pay charges or reopening them. raders preerring trading instruments with expiration dates, may trade CFDs on commodity utures. Te only group o instruments that has commissions in IFC Markets is Stock CFDs (only or opening a position).
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CHAPER 2 CHOOSE YOUR CFD PROVIDER
Guidelines to choose your CFD provider When we need to buy a product, we go to a shop. Tis is a simple real lie situation. No matter how ar the shop is rom our living place, we always preer going to the best one. But what kind o a shop is considered to be the best? - Te one that offers a wide choice and resh products. But this is not enough. Pleasant communication is just a necessity or a human being. Accordingly, while selecting a shop, we take into account high-quality customer service, as well. Te same criteria are applied in financial markets. When we want to get financial services, we always seek or high-quality ones, be it a bank, an insurance company or a brokerage company. So, afer determining to get involved in CFD trading, the first thing that you are planning to do is to choose your CFD provider. Te growing interest in this derivative product has resulted in emergence o a number o CFD providers. Tat is why the choice o your CFD provider has really become a difficult task. However, it can be simplified i you define specific criteria which will guide you on your way to orientate. Additionally, you can use the below oered guidelines.
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Te reliability of the provider Tis should be taken into account rom the very beginning. It goes without saying that a company, operating since 2006, is ar more reliable than the one, operating since 2011. Tis may serve as a benchmark to check the company’s reliability. Another reliability indicator is the company insurances o its clients’ unds, since anyone, beore investing his money, wants to make sure that his money is in reliable hands. Te margin requirement level Since the key advantage o CFD trading is that it allows trading on margin, knowing your provider’s margin requirement level is a must. In most companies it usually ranges rom 5% - 10%. So, consider the size o leverage that your provider offers, never orgetting that high leverage is a tool o magniying both the potential profits and losses. Service charges Beore entering any financial sphere, it is important to know what your expanses are. Some providers charge service commissions. Te commissions are charged mainly or Stock CFDs, sometimes it may be applied or opening and closing a position, sometimes only or opening a position, which may range rom 0.1% - 1%. As CFD trading is not a standardized procedure, these conditions vary rom one provider to another. rading Platform rading platorm is an online station, which will give you an access to live quotes o any asset that interests you, enabling you to track their price movements. Trough the trading station that is equipped with tools or technical analysis you make predictions about the market and make trading decisions, i.e. to open buy or sell positions, when to enter and exit the market, what orders to use, etc. It is impossible to trade online without a trading platorm, so you need to study the provided platorms and use the one that suits your trading requirements and preerences. Te CFD types offered Te wider the range o CFDs is, the more trading opportunities you have. So, take under consideration CFD types that the broker offers. It will be better i you have an opportunity to trade Stock, Index and Commodity CFDs. Moreover, check to what markets your provider gives an access. Maybe you want to trade American Stocks, but the provider offers only
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European ones, or vice versa. Choose the one which satisfies your requirements and interests. 6. Spreads, the difference between bid and ask prices ight and narrow spread is also an important actor or consideration when choosing a broker. Te narrower the spread, the more beneficial your trade will be. Additionally, check the spread type i it is fixed or floating. Which one o them is more beneficial, depends only on your preerences. 7. CFD account opening procedure Tis procedure should take very short time. You just need to clariy what are the main procedures and requirements to open a CFD account with a certain broker. Tere are companies that offer universal accounts or trading both Forex and CFDs. So, in this case you will not need to open a separate account and can manage your trading easily and ast rom a single account. 8. Risk management tools Check i your broker offers risk management tools, like or example stop-loss order, position hedging opportunities, etc. 9. Customer service It is not always easy to find necessary inormation about the broker. Customer service is there to assist you. Actually, rom the very beginning checking the customer support quality, you can make a general idea about that company. So, customer service should be round – the - clock and competent to solve all your problems and to provide you with necessary inormation. Whether you are an experienced trader or a beginner, your CFD provider has a direct affect on your trading results. Be sure that your success in many aspects depends on the company you have selected to work with.
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CHAPER 3 RADING IN ACION
An example of CFD trading deal Now when you already know all principles o CFD trading, have chosen your CFD provider, it is time or you to see how a CFD deal is perormed, based on a concrete example. We will use NetradeX trading platorm, offered by IFC Markets, to see step by step how the deal is made. Going long As already has been mentioned in Chapter 1, “going long” means you open a buy position, predicting its price to jump, aiming to sell it later with higher price, thus making profit. Opening a Buy CFD position
Let us suppose that we decide to buy 100 barrels o Oil. On the trading platorm we see buy/sell price o 1 barrel equal to 60.56/60.50. So, we decide to buy 100 barrels o oil with Ask price o $60.56 paying or it $6 056. Since our account leverage is 1:100, we do not need to pay the whole sum. Te minimum margin requirement, offered by IFC Markets is 2.5%, so we need to pay only a raction o it, investing just $151.4. Closing the CFD position Some time passes and the market starts moving in our avor, i.e. Oil increases in price and we decide to sell it, i.e. to close our CFD position with Bid price o $77.05, getting or it $7 705. Calculating our profit
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Since the closing price o our position is higher than the opening price, we have made a profit. We can calculate our profit in two ways: (77.05 – 60.56) * 100 Oil barrels – 6 spread = $1 643 $7 705 – $6 056 – 6 spread = $1 643 Going short In CFD market you have an opportunity to make a profit on alling prices, as well. So “going short” means that you open a sell position, predicting its price to all in order to buy it later with lower price, thus making profit. Opening a Sell CFD position Let us again suppose that we trade 100 barrels o Oil, but in this case we have decided to speculate on the alling price. So, we sell our 100 barrels o Oil by 60.50 rate, paying or it $6 050. But as we can enjoy 2.5% margin and 1:100 leverage, our actual investment will be $151.25. Closing the CFD position Some time passes and the Oil price decreases. We decide to close our position, in other words to buy 100 barrels o Oil by 57.09 rate, paying or it $5 709. Calculating our profit Te calculation ormula in this case is the ollowing: (60.50 – 57.09) * 100 Oil barrels – 6 spread = $335 $6 050 – $5 709 – 6 spread = $335
So, based on the above mentioned examples, we see that profits can be ormed both in rising and alling markets. Likewise, i our expectations are not justified, we may end up with losses.
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CHAPER 4 CONSIDER AND MANAGE YOUR RISKS
Risk management tools Knowing how to trade CFDs is not enough to say that you are an experienced trader. What makes you an experienced trader is your ability to manage your trading and to protect your positions rom losses. Since CFD trade is perormed through margin, it is quite risky. Margin trading enhances your profits and in a similar manner, your losses. Tat is why it is highly recommended to be aware o the ways to protect losses both beore starting the trade and during it. Educational materials, trainings, seminars Beore starting your business and even when you are already involved in it, it is always worth attending some trainings and seminars, just to raise your educational level. I you are short o time or financial means, nowadays internet is ull o ree educational materials. Being educated and trained may lead you to more successul trading. Ability to analyze the market By analyzing the market, you can more easily predict its movement. Beore opening a long or short position, consider the world financial and political news. Always ollow what is going on in the world. All kind o events have a direct impact on the market. You can also make a technical analysis, using all technical tools, like indicators, graphical objects, offered by the broker. Some CFD providers have their own analytical department which publishes analytics or the customers on
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a daily basis. You can either analyze yoursel or trust your CFD provider. In any case, analysis is a prerequisite to successully manage your trading. Using stop-loss order Check with your CFD provider i it offers Stop-Loss order. Tis is, perhaps, the most effective risk management tool. Stop-loss order has a power to automatically close your position at a price, set by yoursel. Tis is mainly useul when you lack time to track your position or when your internet connection is poor. However, there are some circumstances in which stop-loss ails to be effective. For example, in case o gaps your order may be executed not at the price, set by you, but at the first price available in the market afer the gap. Hedging your positions Hedging is a trading technique that allows you to protect his positions rom unpredictable price movements. It goes without saying that your primary aim to enter the market is to make a profit, but in many cases the market volatility is not allowing you to do it and all is lef to do is to protect your unds, otherwise losses are inevitable. Hedging by CFDs may be perormed in two ways. You can either use CFDs or protecting your positions due to the ability to go short by CFDs or you may protect your CFD position by just opening an opposite position.
GET STARTED Now that you have already learnt the basics o CFD trading, have been amiliarized with all its benefits and disadvantages, you are ready to enter this market. A little practice, a bit o patience, positive thinking and you will have a success. Good luck to you!
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CFD Trading Books
CFDs: Te Definitive Guide to Contracts For Difference By David James Norman CFDs Made Simple By Jeff Cartridge & Ashley Jessen Supercharge Your rading with CFDS By Jeff Cartridge CFDs or Dummies By David Land Making Money rom CFD rading By Cat Davey
Internet sources http://www.ifcmarkets.com/en/cfds
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