The CFD is a product that allows you to profit from the movement in the price of the underlying assets such as stocks, stock indices, futures, etc. without actually buying or selling them. This means that if you bought a CFD on ABC’s shares, you do not actually acquire the corresponding number of shares, but you get the right to make the difference between buy and sell prices. The settlement of the “contract for difference” transaction takes place on the day of its conclusion.
For example, if Intel shares cost $ 30 each and you think it’s underestimated, you can buy “contracts for difference” on 150 shares of that company. If the stock price rises by 1 USD to 31 USD, you will earn a profit of $ 150. If the price drops to $ 29.50, you will incur a loss of $ 75.
Trading in stock indices is the purchase or sale of CFDs on these instruments in order to make a profit from changes in their prices. The index is the average value of the shares of which it is drawn. The US30 index is comprised of the shares of the 30 major US industrial companies, and the USTECH100 index of the shares of the top 100 most popular US technology companies.
For example, if US30 is priced at $ 18,000 and you want to buy it, you must have a minimum of $ 180 in your account (the margin is 1% of the index value). If the US30 price rises to 18,200, you will earn a profit of $ 200. Conversely, if the index drops to 17,800, you will realize a loss of $ 200.
Although it is a financial instrument rather than a real asset, the contract of difference reflects the corporate events of issuers of underlying assets. Such events are: the right to dividend, split, merger of share capital, etc. Contracts do not confer ownership of the Company’s assets or voting rights in the General Meeting, are not freely transferable and are not traded on regulated markets. The market maker that offers these tools has the right to close the positions of its clients if it deems it necessary, whether the underlying shares are still traded on the stock exchange or not.
With short sales, you can also benefit from lowering prices. If you think the prices of the underlying stocks or indices will drop, you can sell CFDs on the current share (index) at the moment, with the idea of buying it at a lower price later and making a profit. Short positions are closed by entering into transactions to buy the same number of shares or indices.
For example, if Intel shares cost $ 30 each and you think it’s overstated, you can sell 100 shares at that price. Later, when the stock price drops to $ 27, you buy the same number of shares, closing your short position and making a $ 300 profit ($ 3 per share). If the price rises to $ 33, you will lose $ 300 ($ 3 per share).