CFD Wiki - Dictionary with CFD terms

CFD

The abbreviation CFD stands for Contracts for Difference. The German term is Differenzkontrakt. CFDs belong to the derivative securities. A derivative is a security that depends on the performance of the underlying asset. In contrast to traditional securities trading, however, traders do not acquire the underlying asset, for example a share, but only the right to participate in its performance via the CFD.

For example, if a CFD is based on a DAX underlying, the CFD replicates its performance 1:1. If the DAX underlying instrument loses, the price of the CFD also falls; if the price of the DAX underlying instrument rises, the CFD also gains in value.

So why don't investors trade the underlying right away? Classic stock trading is significantly more capital intensive than CFD trading. Investors who enter securities trading via CFDs only have to raise a fraction of the actual share value and, due to the leverage effect, have the chance to achieve greater profits with less capital investment.

CFD brokers allow access to stock trading from a minimum deposit of a few hundred euros and provide the entire infrastructure, including trading software, price supply, analysis and chart tools. CFD trading is so popular among investors because of its structure combined with a low capital investment and leverage.

With CFDs it is therefore possible to participate in the price development of underlying assets in the form of shares, currencies, indices, bonds, exchange-traded index funds and commodities.

Future

Futures are contracts oriented towards the future. Like CFDs, they are derivatives and speculative securities. While CFD trading has no fixed expiration dates, futures are geared to fixed expiration dates in the future. The trading partners agree to trade the underlying market at a precisely defined date in the future.

Contract

A contract in trading is a contract between two parties, investor and broker, which is based on certain standardized performances. Three examples are CFD and futures and options contracts. They are traded based on the terms agreed between broker and/or investors.

Underlying

This is a term used in financial derivatives trading. The German term is Basiswert. With a derivative in the form of a CFD, the purchase of an underlying, for example from the DAX, is agreed. With a derivative, investors profit from the opportunities of an underlying without being its owner. Profits and losses of the derivative (CFD) depend on the performance of the underlying. Underlyings can be shares, commodities, currencies, indices, ETFs, bonds and cryptocurrencies.

Pip

The abbreviation Pip stands for the English term "percentage in point" and refers to the second or fourth decimal place of the exchange rate of a currency pair. Whether the pip is the second or fourth decimal place depends on the decimal places of the traded currency pair. Thus, the pip is the smallest changeable value of a Forex currency pair.

Spread

In CFD trading, the spread is the price range between the quoted buy and sell price, referred to as the difference. Another term is "difference between bid and ask price". Thus, the spread is the fee charged by the broker for the execution of the respective position.

Furthermore, there are brokers that additionally charge order fees and commissions. Traders should therefore take a close look at the fee model before deciding on a broker, so that the costs for the executed trading positions are not too high. Spreads can be higher or lower. As with prices, the level of spreads depends on market volatility and the liquidity of the underlying.

Overnight fee

For each CFD position held overnight in CFD trading, the broker charges a so-called holding fee. How high the overnight fee is depends on the respective underlying and the CFD broker.

Overnight fee time

In CFD trading, no minimum term is set for the individual positions. Investors can therefore hold their positions for as long as they wish, but in return they must finance the holding fees overnight. Overnight fee is either added to or deducted from the trading account. This operation is calculated at the time of the overnight fee period.

Margin

In CFD trading, investors do not buy the underlying asset, for example a share from the Dax, but deposit a security deposit known as margin on the trading account provided by the broker for each trading position opened. The margin amount depends on the asset class and varies depending on the level of leverage.

The leverage multiplies the deposited security deposit and is specified by the CFD broker, or can also be optionally adjustable. With the margin in combination with the leverage used, investors trade more capital than they own. With a capital investment of 100 and a leverage of 30, investors move 3,000 euros on the capital markets. From this capital sum, possible profits, but also losses are calculated.

Leverage

Since CFDs are leveraged products, participation in securities trading is possible with a significantly lower capitalization. With a stake of 100 euros, for example, 2,000 euros can be moved on the capital markets with the corresponding leverage. Even the smallest price movements enable larger profits, which are not possible in classic securities trading or only with very high capital investments.

Investors deposit a security deposit with the purchase of a CFD on a stock or other underlying. For example, if the share price moves by 1%, the CFD position with a leverage of 1:5 moves by 5% in the respective direction.

Investors need to be aware: Not only the profits are leveraged, but also the losses. If the contract moves against the investor, this can even lead to a total loss.

Margin Call

In CFD trading, Margin Call means that the margin deposited in the CFD account is insufficient. It is a warning sent automatically by the trading system that the open positions on the trading account are no longer covered by the capital. The margin, i.e. the deposited security deposit, has been used up. The broker asks the investor to inject additional capital to keep the positions open.

If the market moves long enough against the investor, a total loss occurs in the worst case. With the new EU regulation, margin calls are prohibited, at least for European CFD brokers. If the capital on the CFD account is used up, the CFD broker closes the trading positions automatically.

Long

If the investor opens a long position, he expects that the traded asset class will increase in value on the markets sooner or later. A technical term is "going long on the markets". In other words, the investor speculates on rising prices and thus makes a profit. If prices fall, the CFD trader makes a loss.

Short

When investors open a short position, they speculate on falling prices of the traded asset class. In other words, they expect a loss in value over the short or long term. Another term is "going short on the markets". Short positions make the difference to traditional securities trading very clear. While stock investors only have the option of betting on rising prices, CFD traders can also speculate on falling prices. If the predicted price loss actually occurs, CFD traders realize a profit despite the loss in value of the share, while shareholders always suffer losses when prices fall. If the price of the CFD underlying rises, the trader makes a loss.

Stop Loss

A stop-loss order is a useful loss limitation tool and part of risk management. With a stop loss, the corresponding position is automatically closed as soon as the price reaches the price mark set with the stop loss order. In this way, the loss is reduced or profits are secured.

Take-Profit

With the take-profit order, investors take profits already realized and the trading position is automatically closed "in profit". The purpose of Take Profit is to set a certain price target. Thus, investors set a maximum profit limit at which the position is automatically closed at a profit. A take-profit is part of any good strategy for CFD trading.

Limit order

With a limit order, traders set a specific price at which they want to open a position. As soon as the corresponding security reaches the set price, the position is automatically opened and the purchase (in case of a long position) or sale (in case of opening a short position) is executed.