optionfinance No Comments

What does leverage mean for CFDs?

The British FCA (Financial Conduct Authority) stated that many traders do not fully understand the risks of trading contracts for difference (CFDs).

This is one of the easiest ways of speculating on the stock market.

CFDs and other similar financial products allow you to speculate on the future price movement of anything from the FTSE 100 to individual shares or currencies.

Trading with leverage

Leverage means that you only have to deposit a small percentage (margin) of the total value of the investment. The remainder is provided by the broker you are trading with at a specified rate of interest. However, your profits or losses depend on changes in value of the total investment. Leverage magnifies your profit, or loss on a position.

If the total value of your initial trade position is £10,000. The leverage ratio offered by a broker is 100:1. The initial margin for the trade is at 1% of £10,000, therefore you would only need to deposit £100. A market movement of 0.5% against your position, with original value of £10,000, will lead to a 50% (£50) loss against your deposited margin.

Margin close outs

There’s a high chance for your trades being closed at a loss, due to ordinary intra-day market volatility. This is because of high levels of leverage and brokers’ use of automatic margin close out. Trading positions are closed if your available margin falls below a certain level.

Gambling-style promotions

Brokers inform you of bonuses and other freebies. This is too similar to gambling-style promotions. Opportunities to win bonuses through trading or the offer of account opening bonuses or gifts. These promotions can become a distraction for traders. You have to properly assess the level of risk associated with the investment product and trade accordingly.

Receive further information about CFDs

Join Option.Finance Traders’ Club  Receive Trading Tips  Latest Finance information

optionfinance No Comments

What’s the difference between Options and CFDs?

Options and CFDs  have a number of similarities, but there are also a number of differences.

Both financial derivatives suit their own particular purposes. You don’t own the asset but just have a position open based on the asset price. However, there are several notable differences about the way the two products are leveraged.

It’s the actual pricing of the instruments that distances any similarities. While at first look, the two instruments might seem similar.

Factors for comparison.

While contracts for difference are agreements to close out a contract for the profit or loss in the difference between the opening price and closing price of an instrument. Options are simply rights to later purchase shares or commodities at a set price. Options are bought at a fraction of the underlying asset price, and give the trader the right to later acquire the asset if he so chooses. Most often when it’s profitable. The profit portion for the trader comes in later exercising his options when the market for the asset concerned increases. Profit = Selling Price – (Buying Price + Option Price).

Practical differences

The transparency of instrument pricing differs greatly between CFDs and options. CFDs are more accurate tracker of underlying markets than options for many reasons. Options suffer, in the same way as futures. From a decline in their price point as their expiry looms, and indeed it is only logical that this would be the case. The value of the right to buy the shares is, after all, less valuable with less time to exercise that right in your favour before it becomes void. It is often harder to get a feeling if an option represents true value and a fair reflection of the underlying asset market.

CFDs track the underlying market virtually pip for pip. Brokers are required to match corresponding CFD positions with positions of the underlying asset market. As a hedge against risk and a value-added service for traders. This can make it far easier to follow how the pricing is laid out. The exception of certain ‘market makers’, who as brokers have responsibility to set their own spreads and price points, this presents a much more transparent and clear representation of price.

CFDs options

Another advantage of contracts for difference is that they are available to trade in many ways compared to options. This includes indices, exchange rates, bonds, etc. You can trade options on the basis that there is an underlying asset. While you can’t trade options in conjunction with any index or rate. Depending on which bases you are looking to trade this may or may not pose a problem. However, for new traders looking for as much flexibility as possible, contracts for difference provide wide possibilities.

To start trading CFDs or Options

Just submit your details No commitment Get expert advice