Learn How To Trade CFDs CFD Trading Course At CAPEX.com

CFD stands for contracts for difference. They are derivative trading instruments, which means they allow you to speculate on the price of assets like stocks, forex and commodities, without actually owning the underlying assets. When you trade at CAPEX, you’re trading CFDs.

How do CFDs work?

A CFD is a contract between a buyer and a seller, with the buyer paying to the seller the difference between the value of the asset and its value at contract time. With CFDs, a trader can be both a buyer and a seller, as can a broker. Want to learn how to trade CFDs? Continue reading.

There are several important differences to note between CFDs and other types of trading. In this part of our CFD guide, let’s look at how trading CFDs differs from actually owning assets.

CFDs vs Owning Assets

Traditionally, stocks have been traded by traders actually buying, owning and selling the stock. However, if you trade a stock CFD, you’re not actually owning the stock. Instead, you own a contract that depends on the value of that stock. If the stock rises in value by 5%, so does the CFD.

There’s not really any major difference between trading a stock CFD and an actual stock in terms of how the trade pans out. You’ll even be entitled to stock dividends as long as you own the CFD the day before the ex-dividend date.

It’s the same with crypto trading. With CFDs, you can trade on the price of cryptos without owning them. This means you don’t need to worry about having a crypto wallet to store your coins in.

CFDs vs Options

CFDs are often compared to options, which are other trading derivatives that let you trade on the price of things like oil and forex without owning any underlying assets.

Whereas a CFD is an exchange of the difference in an asset’s price from open to close, an option is a buying or selling of the right to trade at a fixed price, wherever the underlying market moves. For example, let’s say you think Tesla stock will move up from its current level of $655. You can buy an option that allows you to buy it for $660 any time in the next month, so you’re quids in if it moves above $660. You may have to pay a premium to do this, and the premium is all you lose if it doesn’t go up.

The main differences are that CFDs provide exposure to a wider range of markets, are easier to grasp and use, and are more transparent as they directly move with the underlying market.

You can read our CFD vs options guide to learn more.

CFDs vs Futures

Like with options, people often wonder about the differences between CFDs and futures, another form of derivative contracts in trading.

A future is a contract in which a buyer and seller agree to exchange an underlying market for a predetermined price at a future date. Futures are often used to hedge against the market – for example, an airline can buy oil futures to hedge against rising fuel prices. A future means you can potentially buy something at an agreed price even if it’s cheaper than the market value at that time.

Futures differ from CFDs in that they are generally traded on exchanges and are less liquid, whereas CFDs are traded directly with a broker. They are also less flexible and are often too expensive for small scale traders due to the rigid nature of most futures contracts.

CFDs are a very popular type of product that is offered by many online brokers, but just what are the benefits of trading CFDs rather than other asset types? Now in this part of our CFD guide, let’s take a closer look at the advantages of CFD trading.

Ease of access

First off, CFDs make it easier than ever before for traders to create an account and start trading. With CAPEX, for example, you can create an account by just providing some basic personal details and verifying your account. Once that’s done, you can then begin trading thousands of instruments right away. CFDs have the advantage of making it easy for brokers to stock all types of assets on a single platform, so rather than being restricted to stocks or commodities, you can trade anything you want through a single account.

Higher leverage

With CFDs, you can trade with higher leverage than you can with other instruments. If you’re not familiar with leverage, it’s essentially where you borrow capital from a broker to make larger trades. We’ll look at leveraged CFD trading a little later on in this guide.

Fractional trading

Another big benefit of CFD trading is that it makes it very easy to invest fractionally in assets – particularly stocks. This means you can invest in expensive stocks like Amazon at a fraction of the price, so you can gain exposure to some of the biggest hitters in the market. We offer fractional share trading at CAPEX, and you can even trade fractional shares with no commission if they’re unleveraged!

No shorting restrictions

With CFDs, you can speculate on the price of assets going down as well as up. This is known as shorting. The best thing about CFDs is they make shorting much easier than it would be otherwise. For example, some markets have restrictions on shorting or require traders to borrow the instrument before selling short. With CFDs, however, you can short any asset at any time without borrowing costs.

No capital requirements for day trading

CFDs make day trading more accessible because there are no restrictions on the minimum amount of capital you need to day trade, like there is in certain markets. Some markets also restrict the number of day trades that can be made through certain accounts. With CFDs, you can day trade regardless of how much capital you have, provided you can meet the broker’s minimum requirements.

One of the most common questions we get is “how do CFD fees work?”. To some traders CFD fees can seem a little complex, so let’s break it down now.

The first thing to know is that most CFD brokers don’t charge commission like is traditionally charged with other assets like stocks. Instead of commission, the main fee you need to consider when CFD trading is the spread. Let’s take a closer look at the spread.

CFD spreads

In CFD trading, the spread represents the difference between the buy and sell price of an asset. The buy price is also known as the bid price, and the sell price is also known as the ask price. The buy price is always higher than the sell price, and generally the underlying market price will be in the middle of these two.

Spreads are implemented by brokers as a way of making money from traders, rather than say just charging a flat commission. They’re based on supply and demand and often fluctuate along with an assets price and trading volume, so spreads are inherently tied to the volatility and liquidity of assets.

For example, imagine the FTSE 100 has a buy price of USD 6,289.5 and a sell price of USD 6,288.5. In this case, you subtract the sell price from the buy price to get the spread, which is 1.0.

At CAPEX, we offer very competitive spreads so you don’t need to worry about sky high costs when trading.

Rollover fees

The other main charge you need to consider when trading CFDs is the rollover fee, also known as the overnight fee and the swap fee. Rollover fees are charged when you keep a position open overnight.

Rollover fees vary depending on the type of asset you’re trading. For example, with forex, the rollover fee is the interest rate differential between the two currencies that make up the pair you’re trading.

To calculate a rollover fee, you use the following equation: rollover fee = (pip value x swap rate x number of nights) / 10. For example, let’s imagine you’re trading one lot of GBP/USD.

If the pip value is $10 and the swap rate is 0.63, the swap fee is (10 x 0.63 x 1) / 10 = $0.63.

Trading with CAPEX.com

The great thing about CFD trading online is that you can do it anywhere there is a secure internet connection. Inevitably, this means that mobile trading has proven particularly popular as traders can conveniently open and close positions from their mobile or tablet as and when it suits them.

Discover the functionality to ...

Trade more than 2,100 CFDs

Manage your investment horizon

Set take-profit or stop-loss limits

Open short and long positions

No fees for opening and closing positions

Trade with and without leverage (StoX)

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When you trade CFDs online, you have the opportunity to trade with leverage. Trading with leverage is where you borrow capital from a broker to make larger trades than you would otherwise be able to. Using leverage allows you to multiply your buying power and potential returns from successful trades.

For example, let’s say you’re trading a stock with 1:5 leverage. By using this leverage, if you put $1,000 into the trade, the broker will put in $4,000, giving your trade a total value of $5,000. At CAPEX, you can trade all our CFDs with leverage, giving you the potential to make bigger capital returns.

Leverage is closely associated with margin, which is the amount of money you need to open a trading position. So in the above example, the margin is $1,000.

While trading with leverage certainly has its benefits, you should also bear in mind that it increases the risk of a trade. We recommend only risking what you can afford to lose, and using our stop loss tools to help you stay in control of your leveraged trades.

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