Table of Contents
- 1 1.What is CFD? What is CFD trading?
- 2 2.What is margin trading? What is margin play?
- 3 3.How does CFD (Contracts for Difference) trading work?
- 4 4.Advantages of CFD trading
- 5 5.Disadvantage of CFD trading
- 6 What asset classes can CFDs be traded on?
- 7 7.Who is CFD trading suitable for?
1.What is CFD? What is CFD trading?
What are CFDs? CFD stands for the English term, Contract for Difference, literally translated in Vietnamese as Contract for Difference.
CFDs are one of the most versatile financial derivatives available today. As an investor, you can use a variety of technical analysis methods, Price Action methods, market news… to predict the price of an asset such as stocks, securities, digital currencies, etc. forex…up or down.
Whether the market goes up or down, you can still trade and make a profit.
Suppose, you predict the asset price will increase, now you place an order to buy the contract (also known as BUY, LONG depending on the exchange).
If you predict the asset price will fall, you will place an order to short the contract (SELL, SHORT).
This way, you can make money even when the market is down. Trading CFDs is a suitable tool for short-term speculation and hedging on the underlying market.
2.What is margin trading? What is margin play?
CFD trading is built from the form of margin trading (also known as margin play).
When playing on margin, you will only need to deposit a small amount to be able to open a trade (also known as a Position, POSITION) with a larger value. The smaller the required margin, the greater the leverage.
In Vietnam, you can trade CFDs on many types of assets such as Forex, International Stocks, Bitcoin, Ethereum, commodities, gold, crude oil… and each asset class will have different margin requirements. .
CFD transactions are different from margin lending in the underlying stock. While both methods involve the use of leverage, CFD trading has no borrowing fees, and underlying securities margin players have to pay interest rates ranging from 9% -18%/year depending on the exchange. agency.
Trading CFDs will not own real assets, and the higher the leverage, the greater the profit amplification and the greater the risk. Therefore, you must carefully consider the leverage ratio before taking it.
3.How does CFD (Contracts for Difference) trading work?
CFD is a product of the financial derivatives market. Derivatives are meant to be created based on underlying market factors. The outstanding difference of CFDs lies in the following factors:
The market can trade both way Long and Short
The market has more leverage
Contracts trading with no time limit
Do not own assets like the underlying market
4.Advantages of CFD trading
The initial investment amount does not need much
Since CFD trades are usually leveraged, you only need to deposit a small amount to open a trade. In the example above, I took Facebook stock for example, you only need 127 USD, but there are many other assets that can be deposited with a smaller amount, such as Forex, gold, silver …
In the image above, I am opening a short EUR/USD trade, with a minimum deposit of 40.59 USD to trade 1 contract worth about 1217 USD.
However, you have to be really careful when using high leverage, because the higher the leverage, the risk associated with it.
No need to pay transaction tax, income tax
Unlike underlying market transactions, current CFD transactions do not need to be taxed for two reasons: one, they do not involve trading in the underlying asset, and secondly, there is no current law in Vietnam. about this form of CFD.
Can trade 2 way
The goal of CFD trading is to make a profit based on price movements, so investors can trade both bullish and bearish to make money.
Upward direction: If you think the asset’s price will increase, you will place a long position, and profit when the price rises later.
Downward direction: If you think the asset’s price will fall, you will place a short position, and profit when the price falls later.
For example, investor A buys Apple stock at $100 per share and predicts a bull market. If the price rises to $105, A will have a profit of $5. If A uses 1:2 leverage, then the initial deposit for this trade is 50 USD.
Investor B also invests in Apple stock at a similar price and predicts the market will fall. So B will place a Short order. If the price falls to $95, B will have a profit of $5.
CFD transactions are contracts between an investor and a broker. No matter how much an investor wants to buy, sell, and at what time…is easier than the underlying market. Order execution takes place almost instantaneously, and trading results (profit/loss) are also credited to the account immediately after the transaction is completed.
While the underlying market takes 2 days to transfer securities to your account, and you can only sell on the 3rd day.
One account, trade multiple markets
Brokers offer CFDs on most financial markets, and it is almost enough for an investor to open a trading account.
5.Disadvantage of CFD trading
Too much leverage comes with risk
CFD trades usually only require a low margin, which can even go up to 1:3000 (in some brokers), but when leverage is too high, even a small movement in the market can make a difference. can result in large losses in trades, which can lead to margin calls if you do not have enough balance in your account. Therefore, be really careful when you use leverage.
Do not own assets in the underlying market
CFD trades are built on the price movement of the underlying asset, they are a contract between you and the contract provider so you will not own the underlying asset. If you buy Apple stock as a CFD, you will not actually own Apple stock, and will not receive dividends like the underlying market.
What asset classes can CFDs be traded on?
In Vietnam, you can trade CFDs on many markets, of which there are 5 popular markets including:
Foreign exchange (also known as Forex): EUR/USD, USD/JPY…
International stocks and stock indexes: US, UK, Australia, Japan, etc.
Cryptocurrencies: Bitcoin, Ethereum…
Metals: gold, silver…
Commodities: oil and gas…
Here I would like to add, all forms of Forex trading in Vietnam are Forex through CFD. CFD activities have not been regulated and regulated by the legal system like Forex trading in banks and financial companies.
Costs when trading CFDs
Brokers usually will not charge a commission, you will pay the spread (spread), overnight interest (swap fee) if you open an overnight order.
The spread is the difference between the bid and ask prices. For example, if the broker offers a buy price of Facebook CFD shares of 318 USD, the ask price is 312 USD, so the spread is 6 USD.
Swap Fees (swap)
Depending on the asset class, you may have to pay a daily maintenance fee, which can be negative or positive, because the exchange rate difference changes every day. You need to monitor the overnight fee if you want to open an order for more than 24 hours.
7.Who is CFD trading suitable for?
Trading CFDs is not a strategy for everyone, you need to consider the following factors to determine whether to trade CFDs:
Have experience in margin trading
Can accept high risk
Want to trade short-term to make profit
Understand the risk factors and have a stable income