CFD is a modern instrument (introduced to the big market at the beginning of the 21st century), which is lately being offered a lot by the different financial institutions, as a new investment strategy and a good alternative to the traditional stock market instruments, in order to benefit from the underlying asset, which in this case can be both a share or bond, as well as an index, currency and even a commodity (basic product).
CFD is a contract for difference. It consists of an exchange of difference of the price of the underlying asset between the parties: participants of the contract. In this case, any stock market instrument can serve as an underlying asset: index, bond, stock, commodity, or even currency.
Same as the Forex market, the market of CFDs is over-the-counter, transactions are carried out electronically, both for buy and sell. However, it offers bigger variety of trading instruments, which opens the doors to retail investors, who previously could not participate in the stock market negotiations with securities and indices.
However, here is also the key difference of the CFD market compared to the traditional stock market: a CFD contract does not give the physical property right of the underlying asset of the contract. It is just a speculative transaction in order to obtain the profit from the difference of prices. In addition, contracts for difference are exempt from all taxes and charges (except for broker commissions) normally charged when executing stock transactions.
It is worth noting that transactions with CFDs are always carried out with financial leverage, usually with 10-20% of the total volume of the transaction. On the one hand, this offers a greater benefit, but also increases the risk of substantial losses in case of adverse movements in the market.
However, many investors see more advantages of CFDs, than the traditional stock market:
- No need to pay duties and taxes
- Possibility of closing the position at any time without penalties
- Higher degree of benefit in a shorter period
- Greater variety of instruments available in the same market type
Trading with CFDs can become an excellent alternative of the investment portfolio diversification, which is now available to all investors.
How to operate CFD’S
The technique of execution of the transaction with CFDs is very similar to the FX market technique.
Let’s imagine that after the market analysis we decided that the price of the AAA asset will go up. The current price of the asset is 100 USD, and a contract of the asset AAA has 10 shares.
We decided to invest 1,000USD and buy 100 shares of the AAA asset, or ten CFD contracts at the current market price.
The forecast is complied and the price of the asset rises from 100 USD to 110 USD. We execute the sell order at the current market price. The benefit in this case would be about 100 USD.
In the example mentioned, we do not apply the “commissions”, charged by the broker for carrying out the operation. These normally consist of a spread, which is already integrated in prices reflected in the trading platform and is applied to the opening prices of each operation.
Click here to see our spreads table.
There is a big variety of investment instruments, which offer different investment opportunities depending on the profile and aims of each client.
The over-the-counter market offers a multitude of instruments for trading, including currencies, stocks, indices, commodities, bonds and cryptocurrencies.
Recently transactions with commodities (which include agricultural products such as sugar, coffee, cocoa, oil) are becoming more popular.
In order to make the market analysis more efficient and to increase the performance of your transactions, we recommend you to learn the following market bases.
Below you can see a list of the most important terms of the financial market.
Financial leverage is a ratio of own capital against the capital lent for the realization of the operation.
Arbitrage is a buy and sell of a financial instrument and the simultaneous opening of a position in another market in order to benefit from the small difference between prices.
Aussie – Australian Dollar (financial jargon).
Central Bank of England is the main financial institution of England that exercises the functions of the main Bank. The Monetary Policy Committee defines the interest rates.
Central Bank of Japan: the Bank’s management assumes full responsibility for monetary policy, but the changes have to be approved by the Ministry of Finance. The Bank of Japan maintains price stability and creates the basis for stable economic development.
Bar chart is a type of price chart where all the elements are expressed through the maximum and minimum prices, based on which a vertical line is formed with the closing and opening prices, which are marked with stripes to the left and to the right of the vertical line. A “bar” as such reflects the volatility of prices in a certain period of time.
Base Currency is the first currency mentioned in the currency pair, the price of which is expressed through the second currency (counter currency). For example, in EUR/USD – EUR is the base currency.
Bearish market is a market where the bearish trend prevails.
“The Beige Book” of the FED is the informal name of a report of economic activity reports in the areas of responsibility of 12 Federal Reserve Banks of the USA. It is a study of the dynamics of the economic activity of the country and serves as an indicator of the future measures of the FED regarding monetary policy.
Broker is an intermediary that performs the operations on behalf of the client for some commission as a fee.
Bull market is a market where the uptrend prevails.
Bundesbank is the Central Bank of Germany.
Consumer Price Index (CPI) reflects changes in prices for the “basic set” of products and services. It is a principal indicator of the country exchange inflation.
Cable means the combination of the Pound Sterling against the American Dollar in the jargon of the traders.
Closed position is a liquidated position of the market, where the opposite operation and account arrangements have already been carried out.
Counter currency is the second currency in the currency pair, through which the base currency is quoted.
Risk is the probability of an unfavorable change.
Collateral is the asset that is in commitment as a guarantee of compliance with commitments.
European Central Bank is a central bank of the Euro Region.
Figure means “100 pips” in jargon of traders.
Flat is a lateral and horizontal trend.
Bid price is the price of the demand.
Kiwi is a New Zealand Dollar.
Lot is the minimum size or unit of measure of an operation.
Long position is an open position for the purchase of an asset.
Moving Average is one of the most simple and popular indicators of technical analysis. It is the arithmetic average of the prices for a certain period of time.
Oscillator is one of the indicators of technical analysis. It serves in situations, when the price is changed within a market broker. It represents a curve that ranges between 0 and 100% and helps to define the overbought or oversold status of an asset to identify purchase or sales signals.
Overnight is an operation for the night, it means with a duration of validity until the next business day.
Point (Pip) is a minimum exchange rate unit. Normally it is the last number of the quote.
Ask price is the offer price to carry out a buy transaction.
Profit is a positive result after having carried out an operation, after having discounted the expenses for its realization.
Spot is an operation of a current conversion with a value date for the second business day after transaction execution.
Sterling is the name of the Pound Sterling in the jargon of traders.
Slippage is a situation in the market, when the stop order is fulfilled at a price worse than that indicated in the order, as a consequence of a strong unexpected volatility, or in a short period of time, when the price, indicated in the order, does not occur in the market, and the quote that follows exceeds the mentioned level because of a sudden change.
Short position is an open position for the sale of an asset.
Spread is the difference between the Bid and Ask quotes, in other words, buy and sell prices. The spread is usually something dynamic and depends on the liquidity and volatility of a certain currency exchange.
Trend is the direction of the movement of prices during a certain period of time. According to its direction, trends can be ascending (uptrend), descending (downtrend) and lateral (sideway trend); Depending on the time of their existence they can be long-term, medium-term and short-term.
Unemployment Rate is the number of unemployed taking into account the active population of a country (reflected in percentages).
Value date is the date when the participants of a financial transaction fulfill their commitments, in other words, they make all outstanding payments. Only business days can be considered as value dates.
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