Trading With CFDs
What is a contract for difference (CFD)?
A CFD is a type of derivative trading, meaning you do not actually own the financial asset but you own a contract that tracks the price movement of the real asset. By trading with CFD, it enables you to speculate on the rapid price movement of the global financial instruments like stocks, indices, currencies, commodities and treasuries.
How do CFDs work?
When you trade CFDs, you do not actually own the underlying financial asset but rather, it is a contract between you and your CFD broker to transact at a particular market price when you want to. For every point that the asset moves in your favour, you will make a gain and for every point moved against you, you will make a loss. Another difference between trading with CFDs and the real asset is that you would not have to pay for the full sum of the asset. For example, if you purchased 1000 DBS shares at $23.00, and thereafter it moves up to $23.20, you would get to collect your winnings of $200 and not pay the full $23000 upfront for the purchase. You would only be asked to make a small amount of deposit on your account. However, should you choose to hold your position overnight, there will be additional holding fees involved and the amount varies from broker to broker.
What is it about leverage and margin?
As mentioned earlier, you would only be required to deposit a small percentage on the full value to open your trade position, which is called the “margin requirement” or “margin trading”. Although margin trading enables you to amplify your gains, it would also amplify your losses. Hence, it is possible for your losses to exceed your deposited amount.
How much does it cost to trade CFDs?
Holding fee: The amount of fees you pay when you hold your position overnight, usually 2-2.5% of the total value.
Market data fee: Brokers might charge you subscription fees for obtaining the market prices. However, it varies for different brokers as some might waive the charges if you trade more than a certain number of times in a month.
Commissions: The brokers either earn from your spreads (the difference between buy and sell price reflected) or simply charge a percentage of your trade. By earning from your spread, they would mark up the bid price (price you buy) and lower the ask price (price you sell) as compared to current market spread.