What is a CFD?

What is a CFD?


CFD is the abbreviation for ‘Contract For Difference’. CFDs are commonly offered on forex, commodities, indices and shares. CFDs are derivatives and thus are classified as complex and risky. The one characteristic that all of these instruments share is that they derive their value from the underlying asset. This means that derivatives traders never actually own the underlying asset – rather, they trade on movements in the price of the asset.


What is CFD on commodities, indices and shares?


A CFD is defined as an agreement to trade the difference in the value of an underlying asset between the time the contract is opened and the market value at the time that it is closed. If the value of the underlying asset goes up, then the buyer generates profit and vice-versa for the seller. If the value goes down, then the buyer incurs a loss and vice-versa for the seller. TradeApp offers OTC CFDs that exist as a private contract between TradeApp and the trader.


What is Forex?


Forex is a type of CFD. Forex is the abbreviation for ‘foreign exchange’. Forex trading involves the buying and selling of currencies. In a Forex trade, you are buying one currency and selling another currency at the same time or vice-versa. Similar to the buy/sell principle in the traditional markets, the decision to buy or sell in Forex rests on whether a trader believes the currency will weaken (fall) or strengthen (rise).


What is Spread? (Trading conditions)


Spread represents the commission cost that the client pays depending on the size of the order executed.
Spread is directly charged to the client equity at the beginning of the trade and the trade begins at a minus balance equal to the corresponding spread commission amount.
If the client opens a BUY position by clicking on ASK, the trade will be opened at ASK rate but the market rate will be the corresponding BID rate. Likewise, if the client opens a SELL position by clicking on BID, the trade will be opened at BID rate but the market rate will be the corresponding ASK rate.
In order for the trade to be profitable, the spread/commission must first be covered by the market price before a trade begins to produce a profit.
In case the client decides to close a position immediately after opening it, the cost incurred would be equal to the corresponding spread calculation for that position.
A “Trading Simulator” feature is available on the TickTech platform when the client logs in to the trading account.


Example of spread calculation on a currency pair


BUY EURUSD 150.000
BID price 1.2000
ASK price 1.2003
Spread = 0.0003
150 X 0.0003= 4.5 USD or 4.01 EUR (spread is calculated on the variable currency of the position, in this case on USD)


Example of spread calculation on a commodity


SELL Crude Oil 0.950 barrels
BID price 50.00
ASK price 50.06
Spread = 0.06
0.950 X 0.06 = 0.057 USD or 0.051 EUR (spread is calculated on the variable currency of the position, in this case on USD)


Example of spread calculation on cryptocurrencies


BUY BTCUSD 0.001
BTCUSD price $9.900
0.001 X 5% = 0.495
Spread = 0.495 USD or 0.441 EUR


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