FXTM information and reviews
OctaFX information and reviews
XM information and reviews
FXCC information and reviews
HFM information and reviews
FxPro information and reviews

InvestLite: How to trade CFDs online?

23 November 2020

CFDs are speculative derivative financial instruments suitable only for investors who know not only the opportunities but also the specific risks of that asset type. How then does CFD trading work and what should investors look for when purchasing and selling CFDs and seeking a CFD provider?

In this article you will find what makes CFD trading so exciting for risk-averse investors, and what opportunities buying and selling CFDs can open up.

CFD online: what arecontracts for difference?

Back in the 90s, CFDs were used by institutional traders. CFD stands for Contracts for Difference. Investment bankers also talk about share swaps. In the interbank market, that is, when trading between credit institutions, these contracts are mainly used for hedging purposes. With the introduction of the Stamp Duty Reserve Tax in Great Britain in 1986, CFDs have become increasingly popular with speculative investors, because a tax of 0.5% on the cash value when selling shares could have been cleverly avoided.

CFD trading online currently on OTC

Unlike stocks, CFDs are mostly traded on an over-the-counter basis in the so-called ”Over The Counter” or OTC trading, that is, outside of an orderly or managed market. In OTC trading, sales and buying are processed direct from the CFD provider or market maker. It sets the buy and sell CFD prices, as well as offers and conditions for trading possibilities. Therefore, when choosing the right broker, CFD traders should check which market maker is trading CFDs.

CFD trading online is interesting for risk-averse investors because they can use CFDs to invest in underlying assets that a “regular investor” cannot trade. For example, when trading CFDs, you can only purchase one contract.

CFD trading on interest rates or futures, products such as orange juice, butter or coffee, is also impressive. It is also possible to speculate on special indices, for example, trading the volatility index.

The market maker is responsible for the appropriate liquidity in the market, sets the buy and sell CFD prices and thus ensures the CFD is tradable.

What does CFD mean?

CFDs are classified as derivatives, so the CFD price is derived directly from the corresponding underlying value, such as a stock or index. Consequently, investors do not acquire an interest in a company or any other real asset and therefore have no rights, for example, to participate in a general meeting or to transfer the underlying asset.

Instead, CFD traders have a claim against a CFD contract partner or CFD broker. However, what many don't know about is that when it comes to dividends, CFD traders are practically equal to shareholders. CFD traders who place bets on price increases will be credited with 85% of the dividend on the ex-dividend day - that is, in exD, or the day the dividend is paid. However, investors holding short CFDs on that day must pay dividends in full.

What is the essence of cfd trading online?

With CFD trading, investors can participate in the movement of prices for stocks, indices, or commodities or currencies taking advantage of the leverage. As you can understand from the name, CFDs use the difference in price between entry and exit times. This is often called the spread. Investors usually trade the CFDs that benefit from increasing prices (the so-called long CFDs, or CFDs that benefit from decreasing prices for the asset (the so-called short CFDs).

The most important difference between CFDs and traditional securities like stocks or funds is that trading CFDs requires only a small amount of capital, but CFDs still progress 1:1 in relation to the underlying asset.

In short: all factors affecting the price of the underlying asset fully affect the CFD when trading CFDs.

Important: With CFD trading, investors can trade all price movements of stocks, indices, commodities, bonds, etc., with the fraction of capital required otherwise.

CFD trading: what to look out for first?

Unlike stock trading, investors wishing to start online trading CFDs only need to collect a fraction of the amount of the investment for the trading position. Usually, CFD traders make a deposit in the form of a margin or security deposit. The underlying asset determines the amount of margin.

Thus, the investment costs of trading CFDs are significantly lower than the costs of direct investment in the underlying asset. Typically these costs range from one to ten percent of the amount traded. When trading CFDs, investors trade the underlying asset on credit.

Therefore, as a rule, buyers must pay interest on financing. However, investors who go short on CFDs usually receive interest on the loans. The reason is that initially you are listed as a CFD seller. Short traders must then buy back the “short sold” CFDs when the position is liquidated. However, leverage can be decisive in CFD trading. By entering into contracts for difference, online investors multiply their share.

An example of cfd trading on a real case

When trading ten contracts, the CFD trader pays one hundredth or one percent margin. So with a market index of 10,000 points, the margin is $ 1,000: 10 x 10,000 x 1/100. In other words: By investing $ 1,000, investors move $ 100,000 to the stock market when trading CFDs (10 x 10,000). If the market index then rallies 100 points to 10,100 index points, the CFD will react just like the index, increasing the value by $ 100. What is a change of just one percent for an ETF or certificate investor is equivalent to a 100% change for a leveraged CFD trader as the value of his ten CFDs of $ 1,000 (10 x $ 100) doubles to € 2,000.

Another important point about cfd trading

When it comes to trading CFDs, traders must consider that each possibility comes with the identical risk. If the market index falls 50 points (-0.50%), the CFD contract mentioned in the example above will lose a lot in value (-50%). As you understand, trading CFDs involves significant risks.

Another example from 2015 shows us how sharply CFDs can act with rate changes. In January, the Swiss central bank declared that it was uplifting the Swiss franc's peg to the euro. Recently, the EUR/CHF currency pair showed intense fluctuations in exchange rates, and at times the respective currency pairs were no more traded. Ultimately, the central bank's decision resulted in appreciating the Swiss franc to the euro by about 20%. Investors in properly leveraged CFDs have experienced unusually huge gains or extremely large losses in relation to their position.

The best place for cfd trading

It's best to trade CFDs on reliable platforms. One of these is Investlite.com. With investlite.com, you will have access to several trading platforms:

All of them can be adapted according to your needs, as well as trading style and preferences using the following features:

Once you've decided which market you want to trade in, you're ready to make the deal. The first thing you should decide is whether to go long or short. The ability to choose any of the positions is one of the main advantages of CFD trading.

Once you have opened a position, your profit or loss will move in line with the underlying market price. You can track all your open positions on the investlite.com trading platform and close them. If you open your position with a buy, you can close it by selling the same number of contracts at the selling price. It works the other way around as well.


Thus, CFD trading is only suitable for experienced and highly speculative investors who are familiar with the necessary risk and capital management in trading. Therefore, investors who want to avoid these risks are advised to still give preference to traditional stock trading.


How do you calculate cfd profit?

You need to take into consideration the position on which you start (buy or sell) every time you want to calculate the potential profit from CFD trading properly. If you are going to buy an asset expecting it to rise in value, your position is called long. For long positions, you need to calculate the profit using the formula that looks like this: closing price / (opening price - 1) x leverage x investment When you are about to sell an asset you do not expect it to decrease in value, your position is called short. For a short position, potential profit is calculated using the formula: (1 - closing price) / opening price x leverage x investment

Who can trade CFDS?

Trading CFDs involves certain high risks, so it is more suitable only for experienced and highly speculative investors. In addition, you need to be very familiar with the risks associated with money management in trading. Therefore, investors with little experience who want to avoid such risks are advised to give preference to the more familiar and easier for beginners stocks trading.

Cases in which you are not eligible to trade CFDs include:

How much does it cost to trade CFDs?

The cost of CFD trading includes the broker's commission, which is usually 0.1%, the funding cost when buying assets, and the spread, which is the difference between the buy and sell price during trading. There are usually no commissions for trading currency pairs or commodities. In this case, the spread is the CFD value. It could also be funding costs or interest earned. Long positions are associated with financial costs, while short positions are of interest. 
In addition, each broker has a certain minimum that will allow you to start trading CFDs.

How do i use cfds for hedging?

CFDs also play an important role as a hedging tool to help investors profit from a falling market. To many investors, the idea of using leverage for hedging may seem inappropriate, but with the right understanding of the mechanisms and risks of CFDs, hedging CFDs can actually make your equity holdings safer than they might otherwise be.

Hedging is an effective investment tool that seeks to reverse or eliminate the risks associated with another form of investment. For example, an investor who owns a stock may want to go short on a CFD in order to hedge his long position in that stock. This way, if the stock price falls, the investor will still not be hurt as the losses incurred in the stock portfolio will be offset by the CFD hedging.

Can you trade cfd without leverage?

Leverage allows you to multiply rates in the foreign exchange market. Trading CFDs using leverage increases your investment in the market while increasing your risk. However, most of the novice traders are unable to use this tool profitably due to the wrong choice of the leverage size.

In theory, you can make a profit without resorting to leverage. However, trading CFDs without leverage can bring more or less tangible profits only if you have a large enough deposit.

It should be borne in mind that, even when trading exclusively with your own funds, you will have to pay a commission to a broker, a spread when opening a deal and swaps for moving a position to the next day.

Is cfd trading safe?

In general, it is safe to do CFD trading. However, you need to pay your attention to the following factors that are going to have an impact on the safety of your trading:

You should also use the tools provided by the broker such as limit orders and stop orders to minimize losses incurred in trades.


Share: Tweet this or Share on Facebook


XM Receives Award at Finance Magnates Africa Summit
XM Receives Award at Finance Magnates Africa Summit

From May 8th to the 10th our team in South Africa was at the first ever Finance Magnates Summit (FMAS:23). XM was there as Diamond Sponsor, and during the summit, we were honoured with the Best Customer Service in Africa award...

30 May 2023

Five Reasons for Copy Trading: Unlocking Your Financial Potential
Five Reasons for Copy Trading: Unlocking Your Financial Potential

With the social trading sector expected to grow and reach a market size of $3.77 billion by 2028, copy trading, a form of social trading, is fast becoming a popular way for traders to achieve their financial and trading goals...

29 May 2023

TRXUSD now available on OctaFX trading platform
TRXUSD now available on OctaFX trading platform

TRXUSD is a popular high-cap cryptocurrency used on the TRON blockchain platform. With the addition of TRXUSD to our platform, our clients can diversify their investments and take advantage of the potential of this cryptocurrency on the market...

24 May 2023

An Introduction to Copy Trading Platforms and How to Choose One
An Introduction to Copy Trading Platforms and How to Choose One

Investing in financial markets can be both daunting and time consuming, especially for those with limited experience in trading. However, copy trading platforms offer a simple and convenient way...

24 May 2023

Planned optimization of MetaTrader 4 platform
Planned optimization of MetaTrader 4 platform

We would like to inform you that on Saturday, May 20, 2023, from 00:30 to 22:00 EEST, the MetaTrader 4 platform will be temporarily unavailable due to the planned...

22 May 2023

T4Trade: Introduction to CFD Trading
T4Trade: Introduction to CFD Trading

Learn what CFDs are, the advantages and risks of trading CFDs as well as some useful tips to help you find success when trading online...

19 May 2023

Editors' Picks

FXCM information and reviews
MultiBank Group information and reviews
MultiBank Group
RoboForex information and reviews
Libertex information and reviews
Vantage information and reviews
FP Markets information and reviews
FP Markets

© 2006-2023 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.