What is a CFD?

What is a CFD?

A contract for difference, or CFD, is an agreement to exchange the difference in the price of an asset between the time a position is opened and the time it is closed. You never own the underlying asset: you speculate on its price movement.

With Aurenex you can trade CFDs on Forex, bullion, indices, energy and other markets.

How CFD trading works

You choose a market, decide how large a position to take and open it. If the price moves in your favour, you profit from the difference. If it moves against you, you make a loss.

Going long and going short

You can open a buy (long) position if you expect prices to rise, or a sell (short) position if you expect them to fall. This flexibility is one of the main features of CFD trading.

Leverage and margin

CFDs are traded on margin, meaning you deposit only a fraction of the position’s full value. This is leverage. It increases your market exposure, and it increases both potential profit and potential loss.

If your losses reduce your margin level below the required threshold, positions may be closed automatically at the stop out level.

Costs to consider

• Spread: the difference between the buy and sell price.
• Commission: a fixed fee on some account types.
• Overnight financing (swap): a charge or credit for holding positions overnight.

Markets you can trade

CFDs are available on currencies, gold and silver, indices such as the DAX, Dow Jones and S&P, and energy including US Crude, UK Brent and Natural Gas.

A simple example

You buy a CFD on an index at 18,000 and the index rises to 18,100. With a position of 1 unit per point, your profit is 100 points. If it falls to 17,900, you lose 100 points. Costs would be deducted from the result.

The risks

CFDs are complex instruments and carry a high risk of rapid loss because of leverage. You can lose more than your original investment. Consider whether you understand how CFDs work and whether you can afford to take the risk.

Glossary

• Long / Short: buying or selling a CFD.
• Margin level: equity as a percentage of used margin.
• Stop out: automatic closing of positions when margin falls too low.
• Underlying asset: the market a CFD tracks.