CFDs are a way of trading the price movements of global financial markets, without buying or selling the underlying instrument directly.
As with traditional dealing, CFD prices are quoted as a buy/ask (the price you go long at if you believe market prices will rise) or sell/bid (the price you short sell at if you think prices will fall). You can also use CFDs to hedge your physical portfolio against any potential loss in value.
A CFD price replicates the price of the underlying instrument, with all City Index CFDs traded in the currency of the underlying market.
CFDs are traded on leverage, which lets you trade the markets using a small fraction of the total trade value. Leverage means you can potentially magnify your return on investment, but can also result in losses that can exceed your initial deposit. City Index offers a range of risk management tools to help mitigate this risk.
Moreover, with over 10,000 markets to trade, you can gain exposure to markets you may not have had access to before. With City Index you can trade FX, indices, commodities and all non-share CFDs commission free, or all Australian share CFDs for a rate of 0.08% (minimum AUD5).
CFDs work well as a short-term strategy that can protect your longer-term investments.
CFD Trading Example: Let's say that you are holding 2,000 OSH (Oilsearch Ltd) shares and are concerned about the near-term outlook for oil prices and therefore energy stocks. The current OSH share price is $5.50/51. This level represents a healthy profit for you. These shares are your ‘core’ holding and you’re mindful of other considerations such as tax implications. With all this in mind, you don’t want to sell your OSH shares.
How can you protect your share holdings using CFDs? By going short with OSH CFDs, you can hedge against share price falls.
You sell 2,000 OSH CFDs at the bid price of $5.50. The ‘market information’ page on our trading platform reveals that the commission rate is 0.10%, and the margin is 10%.
Opening CFD trade: Sell 2,000 OSH CFDs at $5.50Notional Value: 2,000 CFDs x $5.50 = $11,000Commission: $11,000 x 0.08% = $8.80Margin requirement: $11,000 x 10% = $1,100
If OSH shares now fall to $5.00: Loss on long 2,000 OSH shares - ($5.00 - $5.50) x 2000 shares = $1,000Gain on short 2,000 OSH CFDs - ($5.50 - $5.00) x 2,000 CFDs = $1,000(minus commission of $16.80)
You should be aware that the reverse effect is also true – if OSH shares rise, any profit on your share holding will be offset by a corresponding loss on your CFDs, and you will be required to provide extra margin cover. In the example above, however, you have effectively insured against a $1,000 loss on your OSH shares for the cost of $16.80 in commission.
Open a CFD trading account
City Index is a trading name of GAIN Capital Australia Pty Ltd.
The material provided herein is general in nature and does not take into account your objectives, financial situation or needs. While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments. GAIN Capital recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets. It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com.au, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. GAIN Capital Australia Pty Ltd (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.