In this article we’ll put CFDs under the microscope and explore all the CFD details to be considered in the trading activity. When starting to use a CFD trading platform, (this is the best one in our opinion) you will always have access to the details of the individual product. In this example, we’ll look at the details of the Amazon CFDs.
Now, take a look to the screenshot below and proceed reading the article, where I will explain every single term.
Underlying asset name
Let’s start with the easy stuff. On the first line we can see “Underlying asset name – AMAZON!”. CFDs price are based on other assets, so Amazon CFDs are based on Amazon Stock’s price. So, for the Amazon CFDs the underlying asset will be the Amazon Stock.
In the same way, Ferrari CFDs replicates Ferrari Stocks, Oil CFDs replicates Oil price etc. The asset replicated it’s called “underlying asset”.
The Spread is the difference between bid and ask price in a certain time. At the same time, it represents the cost applied by the broker for its services.
Spread is applied everytime you open a position, therefore a lower spread is cheaper than an higher spread. You can find the lowest spreads in the Currencies trading.
The term “digits” indicates how many digits the price shows. In our example, the Amazon CFD price will show two digits (for example 1750.34). In Forex, you can find 5 digits (for example 1.12635).
Lot value, Min-Max volume, Volume Step
The lot value says how many stocks a lot includes. In the example we have a Lot Value of 100 shares. It means that in this case (Amazon Stocks) every lot includes 100 Amazon Stocks.
When you trade, you can set the lot volume. Let’s see some examples.
If you choose:
- Volume (in lot) = 1 : you’ll trade on a value of 100 stocks
- Volume (in lot) = 0.1 : you’ll trade on a value of 0.1*(100) stocks (so let’s say 10 stocks)
- Volume (in lot) = 0.01 : you’ll trade on a value of 0.01(100) stocks (so let’s say 1 stock)
- Volume (in lot) = 2 : you’ll trade on a value of 200 stocks
Generally, 24option allows you to trade with a volume of 0.01, 0.05, 0.10, 0.25, 0.50, 0.75, 1, 2, 3 and the other multiples until to 10.
Minimum and Maximum Value
Let’s start from the last sentence. As we’ve seen, 24option allows you to trade with a volume of 0.01 until to 10. So, you can see wich is the minimum value (0.01) and which is the maximum value (10).
We can easily say that volume step is the minimum value.
Leverage and Required Margin
CFD are leveraged instruments. A leverage indicates a ratio between:
how much the trader has to invest / the total value of the asset
So, for example, if you want to trade on a value of €1,000 and the leverage is 1:5, you’ll invest effectively €200. This because 1:5 of €1,000 it’s €200.
Leverage allows traders to invest less than a traditional investor. You can find the higher leverage in Currencies trading (i.e. EUR/USD).
The required margins are depends on the leverage. In the previous example we said that if the leverage is 1:5, you can invest €200 instead of €1,000.
Well, in this case, €200 it’s the required margin.
As you can see in the image, the CFD’s details show two kind of required margin:
- Long: it’s the margin for the buy (long) position
- Short: it’s the margin for the sell (short) position
Also called “overnight”, the swap is the charge/credit that an open CFD produces in the overnight.
So, if you open a position and keep it open also when the market closes, during the “night” the CFD will produce a positive or negative swap. On the weekend, therefore there are 3 swaps to be calculated.
If the swap shows a negative value, there will be a charge. On the contrary, if it shows a positive value, there will be a credit.
Generally swap show a negative value and that’s why CFDs are generally preferred for the short term trading (days, weeks, but not months or years).
There are also assets with a rollover date (usually Stocks Indices or ETFs). Rollover date is like a deadline, because the CFDs with rollover replicate an asset with a deadline.
If you trade a CFD with a rollover date, this will be automatically renewed by the broker on the specified day.