CFD is an abbreviation for the term Contract for Differences, and is a type of financial instrument. CFDs were created to give traders all the advantages of owning a share (or an ETF, forex position or a position in a commodity), without having to own the shares itself. A trader will buy a CFD contract at a given price, and when the position is closed at another price, the difference —a gain or a loss— will be settled in cash, therefore it is called a Contract for Differences.
It is important to realize that when you trade in CFDs you can potentially lose all of your deposited funds. Make sure that you understand the risks of CFD trading.
People enter into contracts at the quoted price of their CFD. When that position has been closed, the gain or loss difference can be settled in cash. The most important thing to realize, however, is that you can potentially lose all of your funds in this manner. It’s advised that you trade with caution and learn as much as you can before entering into any Plus500 trades.
As with all trades of this type, you can buy and sell at the rate which is most desirable to you. If you choose to start by buying low, you’ll ultimately want to sell high to gain a profit. If you choose to start by selling high, you’ll ultimately want to buy back at a lower price to turn a profit. Moving too soon in either direction can result in a loss of profit or a loss of money altogether.
CFDs have definitely gained momentum as a popular form of trading in the Plus500 market – mostly because of the simplicity it adds to any type of trade.
Let’s say that you are interested in buying shares from Google. If you used a CFD, you could buy $50,000 AUD worth of shares of Google with only $5,000 AUD. Profits and losses are referred to as differences, and in a CFD those differences are settled with cash instead of physical goods like shares. CFDs also eliminate many of the risks, delays, and otherwise negative aspects of traditional Plus500 trading. Dividends are also adjusted to be paid out in cash through the use of a CFD.
If you have ever thought about trading with Plus500, perhaps there are a few things that you want to understand before doing anything. First, it’s good to know that Plus500 is true to its notice, which says that trading is both legitimate and easy to understand. It’s also good to note that there are no commissions for any person using the world’s trading machine – Plus500. There are also no hidden fees. This is great news because it shows that it’s a respectable way to trade.
Let’s use an example of a trading process that will help you understand how it works. First off, let’s clarify that the term “instruments”, when used in Plus500 trades, is the term used to express the different shares from different companies that are included in this share market. One example of an instrument that you can buy and sell shares from is Telstra, which is known within the world’s trading market as TLX.AX.
Now for the trading example: You open an account and want to start trading immediately. Let’s say that you deposit $5,000 AUD for your initial funding. Of course more money can be added later. Your account status is listed with balance, P&L – or total profits and loss, Available Balance, and Equity. With your $5,000 AUD, this is what your balance would look like:
- Balance – $5,000 AUD
- P&L – $0.00 AUD
- Available Balance – $5,000 AUD
- Equity – $5,000 AUD
So in the main lobby page of Plus500, your options show the available CFDs, or shares of companies that you can trade. Let’s say you decide to go with Telstra because you believe the price of those shares will go down soon. In this case, you would want to go short with Telstra. Purely for an example, let’s say that the current short sale price of Telstra shares is $290 AUD. You want to sell 100 of those shares, so you click the option “short” next to Telstra stock. 100 shares will be 100 CFDs, because 100 shares of Telstra are actually worth $29,000 AUD at the current short sale price. That basically means that you’ve been given a margin of 10% towards the actual cost.
Now your position would look like this:
- Balance – $5,000 AUD
- P&L – $0.00 AUD
- Available Balance – $2,100 AUD, as the 10% cost of $29,000 was $2,900.
- Equity – $5,000 AUD
If the next day, you find that the price actually went up instead of down, the best thing to do would be to cut your losses and play it safe, because this resulting share price increase actually means that you lost money on this trade – $1,000 AUD, to be exact. This is just an example of how a trade can happen, so be sure to use caution in any trade.
Leverage in Trading
Leverage is a term that you’ll see a lot in any share trading platform. It’s basically the term used to describe how your initial deposit, such as a $5,000 AUD deposit, can be used to trade on much broader terms. For example, if you have $5,000 in your account to be used for trades, that’s fine – but it won’t get you very much in terms of profits. With leverage, your $5,000 is actually worth much more so that you can multiply your profits with a small amount of start-up funds. Be advised, however, that this technique can also multiply your losses. Be very careful when trading with leverage to reduce the risk of loss.
You have access to shares, stocks, equity CFDs, index CFD trading, Forex CFDs, and even commodities like gold, silver, and even crude oil. Shares from companies like Telstra, Vodafone, BHP Billiton and other companies can be traded. With as little as a 5% margin, you could gain up to 20 times more leveraged exposure to the shares you want. This could provide multiplied profits or losses.
Index trading is slightly different, as it allows you to be a set amount of shares in the form of indexes. This allows for a higher amount of shares to be traded with higher amounts of leverage. Again, there is still an equal chance for multiplied losses with this technique.
Commodities are traded using the price per commodity method, so if the value of one commodity is trading at AUD588.50, then the value will be the same, or equal to the value of one ounce of gold. Allocating just 0.7% can be multiplied to as much as 150 times leveraged exposure.
Live prices are pulled directly from the most recognized market where your instrument choice is traded. A small fixed premium is applied, and that’s how Plus500 prices are quoted.