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What are CFDs?

The term CFD stands for Contract for Difference. Trading CFDs enables you to capitalize on changes in the price of an asset without actually owning it. One of the most unique aspects of CFDs is that it allows you to profit from both falling and rising asset prices.

Why are CFDs a derivative?

Derivative means that when you trade CFDs, you do not actually own the asset. When you trade CFDs, you speculate on the difference in price from the moment you open a trade until it closes.

Let's take an example of the process of investing in stocks. Let's say you would like to purchase 100 shares of Sberbank at a price of 180 rubles. This means that the total investment will cost you 18,000 rubles, not including commissions or other fees that your broker charges for a transaction. In exchange for this, you receive a share certificate, legal documentation confirming the ownership of the shares.

By purchasing CFDs, you do not get the right to own Sberbank shares. However, you profit from changes in stock prices.

What is "leverage" in CFD trading?

"Leverage" means that you can make a deal with a volume larger than your deposit. In other words, your return on investment will be significantly higher than in other forms of trading.

Let's go back, for example, with Sberbank: 1000 shares of Sberbank cost 180 rubles, and they will cost you 180,000 rubles. When trading CFDs, you do not need to have RUB 180,000 to open a deal with such a volume.

Suppose Novotrend gives you 1:10 leverage on Sberbank shares. This means that to buy Sberbank shares for 180,000 rubles, you will need 10 times less money, that is, 18,000 rubles. But at the same time, you will receive a profit, as when investing 180,000 rubles in a classic trading environment. That is, with less investment, you can get the same income.

If Sberbank shares rise in price by 10%, from 180 rubles to 198 rubles, then the volume of the transaction will be 198,000 rubles, from the initial 180,000 rubles. The difference will be 18,000 rubles. Thus, with an initial deposit of only 18,000 rubles, a CFD transaction will bring you a profit of 18,000 rubles. This will represent 100% of the return on your investment, compared to 10% of the return if the shares were purchased in the usual way. Since in this case you would need the full amount, that is, 180,000 rubles.

However, it is important to remember that leverage can both increase your profits and you can also incur losses. Therefore, if prices move against you, then you may incur losses until the complete loss of the deposit. Also, a situation may arise when you will be forced to increase the size of your deposit, to deposit additional funds so that the transaction remains open. This is important to understand in order to properly manage your risks.

If Sberbank shares fall by 1%, from RUB 180 to RUB 178.2, the transaction volume will decrease from RUB 180,000 to RUB 178,200. Thus, with an initial deposit of only RUB 18,000, this CFD trade will bring a loss of RUB 1,800.

What tools will be available to you?

We offer over 100 different instruments for CFDs, such as:

- Stock indices;

- Promotions;

- Goods (products, commodities).

You can leverage yourself by opening both long and short positions.

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The ability to profit from rising or falling prices

If you believe that the value of assets will rise, then you can open a “buy” transaction, making a profit from the growth.

If you think that the value of assets will fall, then you can open a “sell” transaction, or a short position. This way you can profit from the fall.

For example, if you think the price of Apple stock will go down, then open a short position (Sell) on the Apple CFD. In this case, your profit will grow in line with any price drop. But it should be borne in mind that if Apple shares rise in price, then you will incur losses.

It is important to understand that the amount you earn or lose will depend on the size of your position - leverage, as well as on how much the price of the asset you have chosen will change.

CFD is one of the most popular derivatives, as it allows you to make transactions at a high speed, and also allows you to make money both on the rise in prices and on their fall.

In the next lesson we will analyze: "Basic terms and concepts in trading."

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