Underlying assets in CFD trading. The ultimate guide

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What is an Underlying Asset? – In the Context of CFDs

Updated on: 6 January 2020

Entering derivative trading

Okay, so you have grown a bit in terms of understanding how the world of trading functions. You have your basics down, along with a firm grasp of how trading markets work and what you need to do to succeed. Now we move one step further and dive straight into the heart of the trading industry.

Which means today we are going to talk about what an underlying asset is, the most common types used in the trading business and how underlying assets function. But we can’t do that without explaining derivatives trading first. Let me tell you right now that this is where we prepare to step into the grownups’ league.

Derivatives are thought to be some of the most complex financial instruments you can stumble upon. This being said, you can’t simply skip them because of their complexity, because they play a major role in defining how underlying assets work. And, in the world of trading, these are the bread and butter of any serious, professional trader.

In essence, derivatives are financial contracts, whose value depends strictly on that of an underlying asset. In other words, derivatives derive their value from them. Hence, their name. How derivatives work? Well, in essence, they help you make profit by betting on the future potential value of any given underlying asset that the respective derivative operates on.

The meaning of underlying asset trading

I assume I don’t have to give you the definition of underlying asset, right? Because it is as easy as reading the definition of derivatives backwards. Mainly: the underlying asset is a financial instrument that a derivative bases its value upon. This is the easy part, and I say this, because I can already tell what you are thinking – Easy definition, easy concept.

Actually, although the definition is pretty straightforward, understanding and being able to use the concept behind it is anything but. And the concept goes like this:

A given stock has the option to be sold or bought by the holder for a specific strike price, at the moment the stock’s expiration occurs. We call the company’s stock, in this case, the underlying asset. And, in the situation being portrayed here, the underlying asset is used to identify which item in the agreement imbues the contract with value. In other words, the underlying asset is the security measure, representing the parties’ consensus regarding the derivative contract.

But what will definitely help you better understand how underlying assets function is going through the most common types of underlying assets and detail on their profile and functionality. This being said, the most used underlying assets are: interest rates, bonds, stocks, currencies, futures, commodities and indices.

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You will find a lot more on the trading market, depending on each broker in particular, but these are the most used, which means these are the ones we need to detail.

The most important types of underlying assets

I know there is a lot to chew on, but it is extremely important to build a solid foundation, otherwise you will have no chance of succeeding in the trading industry. What is an underlying asset? You already know that now. You might not control the concept, but at least you have the basic definition with you.

Now it’s time to go deeper.

1. Interest rate

In simple words, the interest rate is the amount of cash you need to pay to a lender, in case you decide to borrow some money. In the financial market the interest rate is usually expressed as a percentage and it is noted annually. The interest rate is common for any loan, regardless of the asset you are looking to acquire or the size of the loan itself.

The only thing that varies is the value of the interest rate. If you are considered a low-risk party, your interest will be low. If you fall into the category of high-risk parties, it will inevitably be higher.

We won’t go into details too much, because everyone pretty much knows what the interest rate is, how it works and the factors that make it vary from case to case.

2. The bonds

Bonds are used by corporate entities, governmental authorities or different states and companies to finance major projects that they cannot fund directly. For that purpose, they sell bonds to interested third-parties, based on a loaning contract, specifying that the lenders are to be refunded within a given timeframe under specific fixed or varying interest rates.

It is most likely that you are already familiarized with the concept of bonds but you didn’t know the exact definition yet. Well, there you go!

3. Stocks

The stock represents a contractual agreement between a company and a third-party that provides the said third-party with an ownership position within the company. As a result, the third-party will be entitled to a part of the company’s earnings, as specified by the number and the value of the stocks it receives. Usually expressed in percentages.

The trading market will greatly influence the value of each company’s stocks, which makes stocks one of the preferred target for many professional traders around the world.

4. Currencies

Currencies are extremely volatile, which makes them highly desirable among traders coming from all corners of the globe. According to the latest data, the forex market alone moves around $5 trillion every day, truly making it the trading honey pot among the connoisseurs.

Whether you go for major currencies or settle for the minor ones, it is guaranteed to have your hands full for quite some time.

5. Futures

Futures are pretty self-explanatory. They are financial contracts either forcing an asset onto a buyer or obligating a seller to sell one. Whether we talk about financial instruments or physical assets, the concept remains the same.

As you may have already guessed, futures have the power to detail the quality of a given underlying asset.

6. Indices

Indices, or market indexes, are basically indicators that track the performance of given stocks, assets or groups of assets, on the trading market. These are excellent tools to use for traders who are interested in major corporations stocks and can use these indices to make educated adjustments to their strategies.

7. Commodities

Easy to use and even easier to understand conceptually. Commodities are either hard or soft. The hard ones are those that need to be processed, extracted or created. This includes oil, rubber, gold and silver and so on. Soft commodities refer to livestock, or agricultural products, for the most part.

There are a lot of traders that deal with commodities, because they are generally easier to deal with and overall steadier than other underlying assets like currencies, for instance.

As I have already mentioned, these are just a few of what the trading market offers in terms of underlying assets options. Depending on the brokers, you can get access to a lot more, increasing your chances of finding something with a higher degree of appeal.

What is an underlying asset market like?

Well, the trading market operates on underlying assets in its entirety. The trick is to know which specific trading branch to enter and how to work within its universe. I know how difficult that can be, because I have walked in your shoes before. The key problem with the basic definition of underlying asset is that it tells you nothing about what to expect.

For instance, operating with shares is more rewarding than the alternatives, but also way riskier. Which means it is only suited for more experienced traders. Compared to that, trading with bonds is the safer way, but the gains are also lower.
It all comes down to understanding the basics and knowing where and how to start. And this is where the gauntlet starts, because there are a lot of aspects, regarding the trading market, that you need to focus on.

All I have done here is to provide you with some of the basics, so make sure to take what you need and baby-step your way to greatness.

Your Ultimate Guide To CFD Trading

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Contracts for Difference, better known as CFDs or Bitcoin CFDs, are trading products ideal for speculating on financial markets. Best-suited for experienced traders, understanding what CFDs are and how they work can be somewhat confusing. This detailed guide will explain everything you need to know about them, and if they are the right trading product for you.

An Overview of CFD Trading

CFD trades allow traders to speculate on asset markets without needing to physically purchase or sell the underlying asset. Based on a trader’s gamble, he or she can profit from the asset’s future value, both if it increases, but also if it decreases. This difference in value is better known as a movement. As a derivative product, the CFD’s value is not directly linked to its underlying asset but comes from the value put upon it by traders and brokers.

By trading CFDs, you can speculate on a variety of assets, including shares, indices, forex and commodities. Bitcoin CFDs are also becoming extremely popular, as are contracts linked to other cryptocurrencies. Although CFDs are a popular trading product, they are unavailable in a variety of countries, most notably the United States. As a result, Europe marks the most popular market for these products.

How Does CFD Trading Work?

The best way to explain how CFD trading works is through an example. Take Asset A, which has a purchase price of €40 per unit, and you intend to purchase 50 units. The cost of your purchase will be €2,000 for the asset, and another amount for fees and commissions. Normally such a trade would require you to put up €1,000 in cash with a broker who gives you a 50% margin. However, a CFD broker would, for example, only ask for 5%, or €100.

When you trade CFDs you need to pay the spread, which is the difference in price between buying and selling. You purchase the contract with the buying price, and exit using the selling price. The smaller the spread, the smaller the movement needs to be in your favour for you to make a profit.

Back to your asset, let’s consider that after your purchase, the asset’s value increases by €0.50, to €40.50 per unit. In a traditional trade, you would be able to sell it and make a 2.5% profit, excluding fees. However, depending on the exchange, the CFD price might not reach the same value.

For our example, let us assume that the CFD’s value only rose by €0.40. Your profit would, therefore, total €20, but this translates to a 20% profit due to the more favourable margin. Furthermore, when trading CFDs, you won’t have additional fees or commissions to deduct from your profits.

Therefore, even though the spread may be higher with a CFD broker than a traditional market broker, your profits are generally greater than if you buy the underlying asset. In a reverse scenario, where your speculation turns out to be incorrect, you risk losing more than you would have in a traditional trade.

CFD Trading: Useful Terms & Definitions

In order to fully comprehend CFD trading, you must get acquainted with its jargon. Any industry has its own little language, even cryptocurrency, and understanding these common terms will help you understand the rest of this guide better.

Contract Value

The full purchasing cost of the contract’s underlying asset. For example, a contract for 500 units of Asset A would have a contract value of 500x Asset’s A single unit price.

Demo Account

A demo account is a fictitious trading account which you can use to practice trading CFDs without any risk of losing your money. It is offered by some of the best CFD brokers, including eToro and Plus500.

Leverage Margin

Leverage margin is an example of margin trading, which is simply the process by which an investor borrows an amount of capital from a broker in order to open a much larger position than he or she could otherwise open. The bigger the leverage, the higher the multiple that can be borrowed.

Limit Orders

Limits are trading tools which allow automatic trades based on pre-set buying and selling prices. These tools allow traders to enter or exit the market at a more favourable return than the current market value, without having to constantly watch the price.

A loss is experienced by a trader when a contract’s value is moving in the opposite direction, thus going against the speculator’s gamble.

Rollover

Rolling over your investment means extending your position beyond an expiry period, oftentimes the end of the day. Rollovers come with specific conditions and can incur additional fees.

Slippage

When markets are experiencing high volatility, it may be unable to execute a buy or sell exactly as per your instruction due to the erratic price movements. Instead, the price might vary slightly.

Spread

The difference between the bid (buy) price and the offer (sell) price for a specific asset.

Stop Loss Order

This is a risk management instrument which protects traders and brokers from massive losses. A stop loss order remains activated until either the order is de-activated or the position is closed.

Underlying Market

The futures or exchange price upon which your CFD quote is based.

Advantages of CFD Trading

There are several advantages to trading CFDs, not least that you don’t need to go through the hassle of safely storing your asset. If you are trading forex, for example, this is not really a concern, but if you are purchasing barrels of oil or gold, then the logistics headaches begin. Here are a few more advantages to CFD trading.

Short a Stock with Ease

While certain markets may forbid shorting, or require the trader to comply with certain conditions, trading CFDs allows shorting at any time and at no additional cost. Since the trader does not own the underlying asset, he or she is able to short Bitcoin CFDs or any other applicable asset.

No Need for a Substantial Trading Capital

Due to the possibility of higher leverage than other products, trading CFDs can be carried out with very low margins, as low as just 3%. Lower margins equate to less trading capital, with the potential for greater returns. However, leverage can also magnify losses.

Enjoy Gaining Access to Many Markets

The primary CFD trading platforms allow you to speculate across different markets and assets. With just one account, you can trade a variety of assets, including indices, cryptocurrency, and forex.

Fact: CFD Trading is a Calculated Risk

Although trading CFDs could provide you with positive returns, due to the high risk involved you should never invest the majority of your capital in such products. It is important that before you start trading CFDs you understand the risks involved. Before venturing into this practice, we recommend you to read 10 CFD Trading Tips worth remembering.

Counterparty Risk

The counterparty is the provider of the contract which is being traded. Should the counterparty fail to meet its financial obligations with you or any other client it conducts business with, then the value of the contract may diminish or disappear.

You Can Lose Everything, and Then Some

CFD trading is a fast-moving investment product which experiences liquidity risks and margins which you, as a trader, need to maintain. If the value moves against you and you are unable to cover the difference, the provider will probably close your position, which means that you lose all your invested funds. Since you do not own the asset, it doesn’t matter if the asset’s value increases later.

Furthermore, due to leverage being used in CFD trading, your losses may go beyond the initial capital you have invested. This is why it is always recommended to set Stop Limits.

Margin Top Up

When a price movement is highly volatile, your broker may require you to urgently top up your invested capital in order to keep your position open. Not fulfilling this requirement in time will lead to the closure of your position and associated losses.

Price Discrepancies

The price charged by your CFD provider may be more expensive than the asset’s value when bought on an exchange.

Breaking Down the Cost of CFD Trading

While the fees associated with CFD trading are normally lower than most traditional trading products, they are still significant. It is important that you understand the exact costs of your broker prior to opening a position, in order to calculate the minimum price movement required for you to turn a profit. The following are the primary costs involved with CFD trading.

Commission

Commissions are charged whenever you open or close a position, and are normally a percentage of the value of your trade. Certain platforms charge a minimum commission which you will have to pay if the percentage does not exceed it.

Spread

Whenever you buy a CFD you need to cover the spread cost, which is calculated as the difference between the asking price and the bidding price. Low liquidity markets tend to have larger spreads which make it more difficult to get a return from a trade.

Holding Costs

Holding costs are comparable to loan interest rates. When you borrow an amount from your CFD broker in order to open a position, you are charged holding costs on this amount. These costs increase every day that your position is kept open until the debt is repaid.

Market Data Fees

Market data fees are monthly charges which traders pay in order to access price data, especially for international markets. This fee varies considerably between brokers, and can also be completely waived if you are a regular trader.

What’s the Realistic Seed Money Needed to Start Your CFD Trading Journey?

As mentioned earlier in this CFD trading guide, you should only invest part of your capital in this product due to the high risks involved. However, this budget would still need to be of a certain size in order for you to have a good opportunity to turn a profit.

Basing yourself on the advice of industry experts, it would be ideal if you could begin with a seed capital of around €20,000. This value is based on the following assumptions and calculations:

  • Using a realistic commission of 0.1%, you will pay €20 every time you open or close a position (assuming you invest all your capital in just one CFD)
  • Taking 50 trades in a year, almost 1 a week, this works out to €2,000 (ignoring any potential movement)
  • This means that in order to break even you need to earn at least 5% on your trades
  • With a smaller capital, the required profit margin gets even higher

Whilst it is possible to invest in CFDs with a smaller seed fund, it becomes much riskier and puts additional stress on your decision-making.

Looking for a Reputable and Reliable CFD Broker

Using a reputable and reliable CFD broker can make all the difference in your trading experience and subsequent results. Choosing the right broker can be difficult, especially if you are new to the CFD game, but here are a few tips to help you choose the right one.

  • Choose brokers who are regulated. CFD trading is risky enough without needing to worry about a dodgy broker who scams you.
  • Have a look at support options. If you need to get in touch with your broker, the process should be easy. Some of the best brokers offer multiple options, including live chat.
  • Withdrawals should be almost as easy as deposits. While it is ok to have to wait a couple of days for withdrawals to be processed, you should not have to chase the broker for your money.
  • The platform and markets should suit yourneeds. You know what you wish from your broker, so use demo accounts until you find the right combination of markets and features.

Should You Opt for CFD Trading?

At this point in this CFD trading guide, you might be unsure whether this investment product is right for you. Answer the following questions and find out the answer now.

Are you a long-term investor?

CFD trades are fast and incur holding fees for every day that they are kept open.

Do you lack sufficient knowledge in CFD Trading?

Although this guide should help you understand CFD trading it cannot provide the knowledge you need to successfully trade specific assets. Understanding the movements of these assets is essential to correct speculation. Moreover, it would serve you well to understand the differences between crypto CFDs and crypto assets.

…if you’ve answered ‘yes’ to these questions, then CFD Trading is not for you.

On the other hand…

Do you want to hedge your portfolio?

This involves taking on the opposite side of your trades, lowering your portfolio’s volatility.

Do short stocks interest you?

Carrying out short selling is an alternative trading mechanism which allows you to turn a profit when the price of an asset drops.

Do you want to trade in a variety of markets?

CFDs allow you to trade with a mixture of markets, such as forex, stocks, and futures, using one single platform.

…if you’ve answered ‘yes’ to these questions, then CFD Trading might very well be for you.

Concluding Thoughts

While this guide has served to teach you all that you need to know about what CFD trading is, how it works, its benefits, and its risks, you still need to research the market or markets which you intend to invest in. Markets are affected by a variety of internal and external factors, and it is important that you are aware of what these factors may be.

In the case of Bitcoin CFDs, for example, external factors may include industry legislation or project announcements. The best way to stay informed of such information is to follow cryptocurrency news.

The advantages of CFD trading are considerable and are even more significant when you are trading tangible assets. Using a conservative budget you can trade on margin, exposing yourself to huge potential gains, or losses. While there is no foolproof strategy for success, informing yourself of the market, understanding asset charts, and using automated tools such as buy/sell limits should give you a higher probability of turning a profit, or, at the very least, limiting your losses.

Before you begin trading CFDs you should ensure that your investment strategy and capital allows it. There is no sense in investing in this product if you do not have sufficient starting capital, or if you do not have the time for short-term investments.

Once you have decided to trade CFDs, your next task is to settle on a reliable broker. Make use of demo accounts to try different platforms and test a few trades. Be sure to also check on the broker’s fees so as to calculate what minimum profits you should make on each trade.

In conclusion, as long as you understand the risks and charges involved, CFD trading could contribute a significant return to your investment portfolio. As an experienced trader, CFD trading offers you an opportunity for higher profits based on your in-depth understanding of the market.

Welcome to Mitrade

If you are reading this, it may be your first time coming across the term CFDs or Contracts for difference. Hence, the question you might be having is what is CFD?

In this post, we would comprehensively explain any questions you might have about CFDs. You might also want to learn about how to trade CFD we would also cover in this post.

A CFD stands for contract for difference, is a type of derivative that enables you to trade on margins. This, therefore, provides you greater exposure to financial markets, such as gold, commidity, forex, cryptocurrency, indices, etc.

When you trade CFDs, you do not buy the primary asset. You simply buy and sell units of the primary asset. Individuals usually buy or sell if they think the assets would either rise or fall.

Take a look at the real-time BTC/USD quotes on Mitrade. When the bitcoin price collapses in the financial market, If you sell the BTC/USD at $8000 and you set up the “take profit” at $7200, then if the price continues going down and reach the point of 7200, then this contract will close up and you will take the profits.

Essentially, CFDs are contracts between a trader and a broker. Both parties agree to exchange the difference in the value of each primary security from the beginning to the end of the contract.

In a trading process, you will often meet the following terms that also explained what is CFD trading.

★ Short and long trading

Short or long CFD trading is usually as a result of your actions as a trader. When trading CFD’s you can speculate price movements which then informs your decision to either buy or sell. If you buy more CFDs of an asset because you believe the price would rise, this is termed ‘going long’ and when you sell it is called ‘going short’.

The basic of long trade is to “Buy Low = Sell High”. However, a short trade is to “Sell High = Buy Low”.

★ Leverage

Online CFD trading is leveraged. This means you can get access to large positions without committing totally to the cost of the outset. If you wanted to open a regular trade you would be required to pay the complete cost upfront. With CFDs, you are allowed to pay a fraction of the cost, for example, 5% upfront. Leverage allows you to spread your capital extensively to maximize profit. Although you are allowed to pay a fraction upfront, profits and losses on CFDs are calculated using the full size of the position.

For instance, If you paid 10% on a position, the profit or loss is calculated based on the total value which is 100%.

★ Margin

Margins are important for trading on leverage. Margins are used to open and maintain positions. They usually represent part of the entire size of a position. There are two types of margins in CFD trading namely Deposit and Maintenance margins. Deposit margins are used for opening positions while Maintenance margins are used to limit losses during trades.

★ Hedging

Contracts for difference can be used to hedge losses from an existing portfolio. For instance, if you believe some shares in your portfolio might suffer a short term dip in value, you can offset some of the future losses by going short on the market with a CFD trade. Hedging your risk in the manner would allow you to gain every loss in value through your short CFD trade.

To properly understand how CFD trading works, you would need to understand what you are buying and selling, how you can make money and the cost in this process.

First off, let’s look at the contract for differences in a specific market. Let’s take the EUR/USD as an example. Below is a contract for EUR/USD.

Mitrade, as the fast-growing forex brokers in Australia, providing a tight spread and low costs for Forex CFDs.

There are 4 key concepts behind CFD trading.

★ Profit and loss

To understand the profit and loss in CFD trading, you will know how you can make money from it.

Profit or loss = (no. of contracts x value of each contract) x (closing price – opening price)

The formula for calculating profit and loss earned through CFD trading is: multiplying the deal size of the position (total number of contracts) by the value of each contract. (Express this per point movement). Further, multiply the figure by the point difference between opening and closing contract price.

For a total calculation of profit and loss from trades, you would need to deduct any fees or charges you may have paid. These could include overnight funding charges and commission.

For example, if you think the bitcoin price will rise in future times, then you buy 50 bitcoin contracts at the buy price of 7500. One bitcoin contract would then be equal to $10 per point. There are two types of results.

When the price grows at 7505, your profit would be

$2500= (50 x 10) x (7505.0 – 7500.0)

When the price decreases at 7497, your loss would be

$1500 = (50 x 10) x (7497.0 – 7500.0)

★ Deal Sizes

The size of a single contract is dependent on the underlying asset that is traded. This allows CFDs to copy how the asset is traded on the market. This is possible because CFDs are traded in standard contracts or lots.

★ Duration

CFD trades usually have no set expiry dates. To close a position, you would need to close a trade in the opposite direction to the one that opened it. For example, buying a position of 300 silver contracts would be closed when you sell 300 silver contracts.

Daily CFD positions that are left open past the daily cut off time would be charged for overnight funding. The daily cut off time for international markets varies and you would need to find out the cut-off times.

★ Spread and commission

The prices of CFD at quoted in two prices. The buy and sell price. The buying price is the price at which you open a long CFD while the sale price is the price at which you open a short CFD.

The difference between the buy and sell price is called the spread.

The cost of opening a CFD position is usually covered in the spread. This means buying and selling prices would be adjusted to show the cost of making trades.

There are a variety of asset classes that can be traded with CFD investment. Actually, CFD is just a financial tool that involves margin and leverage trading. This enables a trader to enter the market without the need to deal directly with the market. This, therefore, provides better liquidity and flexible execution. This also gives the added benefit of short selling when the market is falling.

CFD trading is one of the few available portals to the indices markets. Trading contracts for differences in indices copy the composition of a particular index. The most popular Indices instruments include: US500, AUS200, UK100

CFDs are also well suited to the Forex market because of the higher liquidity that happens in the market. You can trade popular forex pairs with CFD such as EUR/USD, AUD/USD, GBO/USD, etc.

Commodities can also be traded as CFD, including metals like gold and silver, energy like gas and oil.

Cryptocurrencies market is highly speculative and highly volatile, creating many opportunities for traders. The popular cryptocurrency trades include BTC/USD, ETH/USD, XRP/USD and more.

Traditional investments bring higher costs, while trading with CFDs allow you to trade various markets based on price changes without owning the assets themselves. Therefore, you can diversify your trading portfolio on one broker without using various platforms.

Many investors may don’t know CFD (Contract for difference), but most of them know margin trading or leverage trading. Many traditional trading brokers also allow you to trade with margin and leverage. It’s a good opportunity for traders who want a flexible and short term investment. But you also can’t overlook the high risks.

Here are some of the reasons why trading CFD is popular with investors:

● CFD trading is quite flexible as it enables you to trade on rising and falling markets.

● The leverage obtainable when trading CFDs. You can use a small number of funds to control larger positions. This gives you better options for a spread.

● CFDs can be used to offset any potential loss in value through hedging.

● CFDs are also tax efficient.

● CFDs provide you access to multiple financial markets.

Generally speaking, all of the fees will be shown on the contract of the market. There are no hidden fees on a reliable CFD broker.

Spread

The spread is calculated as the difference between the price of buying and the price of selling. When you enter a buy trade using the quoted buy price and leave using the quoted sell price. The thinner the spread, the less the price needs to move in your favor before making a profit. If the price moves against you, you would realize a loss.

Overnight costs

Overnight funding will be debited or credited if the position is held passed a certain time. This cost depends on the direction of the position and the applicable holding rate.

⭐ Market data fees

In order to trade or view price data for CFDs, you would need to pay the required and necessary market data subscription. But not every platform charges the market data fees.

⭐ Commission

This only applies to shares. You are required to pay a separate commission charge for trading share CFDs. If you trade forex, indices, gold, or bitcoin CFD, there is no commission fee.

As CFD is just a tool that is available in many instruments trading, there is always something available to trade. Here are CFD trading times of popular CFDs;

Forex CFDs: trading 24/5

Index CFDs: trading 24/5

Commodity CFDs: trading 24/5

Cryptocurrency CFDs: trading 24/7

The busiest trading times are when the markets are traded. We take forex as an example.

Forex Trading centers in the world

Trading hours in local time

Wellington, New Zealand

Hong Kong, China

Johannesburg, South Africa

London, United Kingdom

New York, United States

Chicago, United States

*Please note that all times are 24-hour clocks.

There are various risks associated with CFD trading. The risks associated with trading CFDs usually involve counterparty risk, market risk, client money risk, and liquidity risk.

▲ Liquidity risk

If there are not enough trades happening on an underlying asset, it can cause your existing contracts to become illiquid. This would make your CFD provider request extra margin payments or close your contracts at unfavorable prices.

▲ Client money risk

When you agree on a contract with a CFD broker, they withdraw the initial margin and reserve the right to ask for additional margins from the pooled accounts. If other clients in your pool fail to meet margin calls, the CFD provider can collect from the pool account and this might affect returns.

▲ Market risk

CFD trading is basically using derivative assets to trade underlying assets. This causes it to be subject to market forces which can affect returns. Misinformation, government policies, or even changes in market conditions can affect returns.

▲ Counterparty risk

A counterparty is simply defined as the company that provides the asset in a financial transaction. Trading CFDs means trading contracts that have been issued by your CFD provider backed by an underlying asset.

Although Futures and CFDs are both derivative products there are significant differences between them.

If you buy a set number of CFD contracts you expect the market to rise and if you sell this means you expect the market to fall. When trading CFD, you can close your position at any time.

Futures are contracts that you buy when you agree to buy a financial instrument at a fixed point in the future at a predetermined cost. There are a set date and price for the transaction, unlike CFDs.

Now, you know the CFD meaning, how does it work, the costs and risks about CFD investing. Next, if CFD a good investment for you?

If you are an investor looking to make good returns on your money, then CFD trading is definitely for you. You should start with a demo account when trying out CFDs for the first time. Trading CFDs can be risky and It is therefore not suitable for all.

CFD trading is suitable for people who:

● Want to diversify and mix up their portfolio. There are so many markets including shares, commodities, FX, cryptocurrencies, and indices.

● Want the flexibility to be as active or passive as they want when trading.

● Are looking for short term opportunities as CFDs are usually held for days or weeks as opposed to longer periods.

● They are looking for what to invest in but don’t have enough capital.

Mitrade is a simplified online trading platform for CFD markets. They provide users an easy and convenient way to access almost 100 different markets including forex, commodities, indices, and cryptocurrencies. They charge no commissions and offer competitive spreads with up to 200 times the leverage.

They offer an intuitive trading platform with free and technical real-time charts and quotes, which is user-friendly for new traders and experienced traders.

Moreover, Mitrade is regulated by ASIC (An Australia regulatory license), which is one of the first-level finance licenses. Therefore, you don’t need to worry about safety and scams.

What can you trade with Mitrade?

Forex CFDs: EUR/USD, GBP/USD, USD/CAD, AUD/USD, USD/JPY and others

CFDs on indices: EU50/ FR40/ NAS100/ AUS200/ US30/ UK100/ HK50 and others.

Commodities: Silver, Gold, Platinum, WTI, and others.

CFDs on popular cryptocurrencies: Bitcoin, Ethereum, Litecoin, Ripple, etc.

CFDs are a leveraged product and can result in the loss of your entire capital. Trading may not be suitable for everyone. Please consider the risks before using Mitrade services. You do not own or have any interest in the underlying assets.

Do you want a seamless trading experience?

Try a free demo account or open a real account to get your amazing welcome bonus!

Provide a full range of quality column content for global investors

Risk Warning: are a leveraged product and can result in the loss of your entire capital. Trading may not be suitable for everyone. Please consider our PDS, FSG, Risk Disclosure Statement and Client Agreement before using our services and ensure that you understand the risks involved. You do not own or have any interest in the underlying assets.

Mitrade does not issue advice, recommendations or opinion in relation to acquiring, holding or disposing of our products.

All of our products are over-the-counter derivatives over global underlying assets. Mitrade provides execution only service, acting as principle at all times.

Mitrade does not issue, buy or sell any cryptocurrencies nor is it a cryptocurrency exchange.

This website is owned and operated by Mitrade Global Pty Ltd ABN 90 149 011 361, AFSL 398528. This AFSL authorises us to carry on a financial services business in Australia. Contact Mitrade at [email protected]

The information on this site is not intended for residents of the United States, Canada, Japan, New Zealand or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For certain jurisdictions, card processing service is provided by Mitrade Services Ltd (a company registered in England and Wales under number 11804044 with registered address at 27 Old Gloucester Street, London, WC1N 3AX, United Kingdom). Mitrade Services Ltd is wholly owned subsidiary of Mitrade Global Pty Ltd.

Secured by SSL. © Mitrade Copyright, All rights reserved.

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