KUALA LUMPUR, MALAYSIA – Media OutReach – 20 October 2023 – With countless abbreviations and numerous strange and unfamiliar terms, the world of finance can be confusing. One such commonly used word is ‘CFD’. The Octa experts explain what it is exactly and how the traders can profit from it below.
Understanding CFDs
A contract for difference (CFD) is a derivative instrument that allows traders to speculate on the prices of various assets without actually owning them. CFDs are traded between traders and brokers, where the trader agrees to exchange the difference in the price of an asset from the time the contract is opened to when it is closed. In CFD trading, traders can profit from both rising and falling markets using long and short positions.
There are several types of assets you can trade with almost any CFD broker. Those include currencies, commodities (such as gold, silver, crude oil, natural gas, and others), indices, stocks, and cryptocurrencies. They are mostly represented in pairs, e.g. EURUSD, XAUUSD, BTCUSD. Indices and stocks have ticker symbols, such as NAS100 (Nasdaq 100), AMZN (Amazon), and TSLA (Tesla).
Pros and cons of CFD trading
Like any form of trading, CFD trading has its own set of advantages and disadvantages.
Advantages of CFD trading
Disadvantages of CFD trading
The role of CFD brokers
Simply put, a CFD broker, such as Octa, is a service that provides intermediary services between an individual trader and the global markets. Retail traders cannot execute orders there on their own when it comes to financial markets with trillions of U.S. dollars in daily turnover. CFD brokers give access and all the necessary tools for market participation, including trading instruments, platforms, indicators, analytics, educational materials, and much more.
CFD trading costs
The three most common fees in CFD trading are spreads, swaps, and per-trade commissions.
The spread is the difference between a CFD’s buy (bid) and sell (ask) price. It is the main fee the broker profits from and one of the most significant costs in CFD trading. The tighter the spread, the lower the cost of trading. Brokers often offer floating spreads that can change depending on market conditions.
Swaps or overnight funding fees are charged for holding a position overnight. They depend on the interest rate differential between the currencies in a pair, called the swap rate. Swaps depend on the direction of the order (short or long) and are usually charged at midnight. On Wednesday night, traders have to pay weekend swaps, which are triple the usual size because it is accrued over two additional days—Saturday and Sunday.
Commissions are charged on each trade. This fee is separate from the spread and is typically a fixed amount per lot or trade. The commission cost varies among brokers and may depend on the type of CFD being traded.
To enhance trading opportunities and make trading more accessible for its clients, Octa decided not to charge any fees except for spreads.
It’s essential to carefully read and understand the terms and conditions provided by your chosen CFD broker. Before the one starts trading, it’s crucial to consider the total cost of trading, including spreads, commissions, swaps, and any other fees. Additionally, the one should be aware of how leverage can magnify both potential profits and losses, which can significantly impact overall trading costs. It is crucial to evaluate these costs to manage risk and maximise potential returns in CFD trading.
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The company is involved in a comprehensive network of charitable and humanitarian initiatives, including the improvement of educational infrastructure and short-notice relief projects supporting local communities.
Octa has also won more than 60 awards since its foundation, including the ‘Best Online Broker Global 2022’ award from World Business Outlook and the ‘Best Global Broker Asia 2022’ award from International Business Magazine.
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