Contracts for Difference (CFDs)
What is a Contract for Difference?
CFDs, or Contracts for Difference, are derivative financial tools that allow trade of indices, futures, individual shares and commodities, without need of their physical possession. The represent an agreement between two parties for settlement of the financial relations upon closing the position, representing the difference between the price of opening and the price of closing the contract, multiplied with the number of shares in the contract itself.
The Contract for Difference (CFD) enables the trade with shares, futures, indices and commodities of margin account. This way one can speculate with the price movement of the shares of the leading world companies. The Contract for Difference (CFD) becomes more and more popular in view of the high speculative profit, which can be achieved upon the strong movements of the shares and the main financial indices within one day.
CFD is based on the margin trade, where you can keep the relevant position against a relatively small deposit. Varchev Finance determines a necessary margin to the amount of 2 % to 10 %, depending on the different specification of the CFD offered. Simultaneously, the profit/loss is recorded to its full amount in the client’s account. Through the free-of-charge software for trade MetaTrader, the client is able to limit the loss from his loosing positions at any time and simultaneously to keep his profit-making positions for unlimited period of time.
Varchev Finance offers to its clients to trade with the shares of the leading world companies and the main stock indices in the world.
The trade with Contracts for Difference is similar to the traditional trade of shares. The deals are executed at a market price, received in real time by the relevant stock market, by paying commission on each transaction.
The CFD tools do no have a fixed maturity date, giving you freedom to close position in a moment chosen by you. While your position remains open, your account is debited or credited with the respective interest payments.
Profitability – Leverage
Using CFD you are able to achieve results, exceeding many times (depending on the margin used) the result, which you would achieve upon real trade. This way, through the financial leverage effect, you will accumulate higher profits, if you have correctly predicted the price movement, but also the risk of losses increases pro rata, if the market goes against you.
Depending on the various legislations in the separate countries, it is impossible to trade separate shares on short positions. But when you trade CFDs, the opening of short positions is so easy, as this of long positions. The CFDs trade gives you the chance to sell shares, without possessing them in advance and to win from drop in their prices.
You are able to protect a multi-national portfolio of shares against a short-term drop on the markets through sale of the necessary number of CFD. Upon back purchase after this drop, the profit from your short position will cover the losses from your portfolio.
The necessary margin for trade with CFD varies between 2 % and 10 % depending on the tool chosen. The margin required for CFDs on American exchanges is a permanent quantity in US Dollars, determined by the above indicated percentages. The margin required for CFDs out of the USA is determined by the above indicated percentages and the current market exchange rate of the respective currency against the US Dollar on the international markets.
The orders upon trade with CFD can be placed on the MetaTrader platform or by telephone. The client can limit the loss from his loosing positions at any time and simultaneously to keep his profit-making positions for unlimited period of time. Varchev Finance enables you to place Market, Limit and Stop loss loss orders upon trade with contract for differences for more effective control on the positions occupied. As upon the currency trade, the contracts for difference allow quick and easy opening of long and short positions.
Example: Purchase of Coca-Cola
In May you decide that the price of Coca-Cola will increase. The price quoted on the MetaTrader platform is 39.92/40.00. You Bid 100 shares of Coca-Cola as CFD (Contract for Difference) at a price of 40 dollars per share.
Varchev Finance allows trade of individual shares at margin deposit of only 10 %. Therefore, at amount of the deal of $4000, you deposit $400. The standard commission, charged by Varchev Finance is $0.05 per share or $5.00.
The interests on your position are calculated each day, after the end of the session of the respective exchange (in our case NYSE) and the necessary corrections are applied to your account. The investors, having long positions, pay interest on the value of the contract, depending on the market, on which the respective tools are traded. It is possible for the investors with short positions to receive interest, depending on the market, on which the respective tools are traded.
In this case, the interest rate applied is Fed Funds + 2.5 %.
Hence, the interest charged from your account for this day is $0.83 ($4000 х 7.5 % / 360).
Closing a Position
In July the shares of Coca-Cola increased, and the quotation in the MetaTrader platform is 45.00/45.08. You decide to collect your profit and sell 100 shares of Coca-Cola at the price of $45.00. The standard commission for the transaction is $0.05 or $5.00.
The profit realized from the position is calculated, as follows:
In order to calculate the final result from the operation, it is necessary to take into account all commissions and interest payments. In this example, if the position has been kept within 40 days, the interest deductions are to the amount of about $33.
This way, the final result from the operation is calculated, as follows:
With Varchev Finance you can open an account for trade with currency, CFDs and commodities with $150 or their equivalent only.