Introduction to CFDs

Never heard of Contracts for Difference? Don’t know what CFDs are? If you ask the European Securities and Markets Authority, better known as ESMA, the best advice would be to remain unaware. But if you choose to ignore that big red “STOP” sign and are bold enough to think you can decide what is right for you, you can learn more about CFDs in our Introduction to Contracts for Difference.

What is a Contract for Difference?

Contracts for Difference (CFDs) are a form of derivative trading that gained popularity among retail investors in the late 20th century. Trading CFDs allows you to speculate on rising or falling prices of various financial assets, such as shares, indices, commodities, and currencies, while taking advantage of the dynamic nature of global financial markets.

CFD trading in brief

One of the key features of CFD trading is the ability to trade on margin — in other words, to trade with money borrowed from your broker. This enables you to open positions larger than your own deposited funds would otherwise allow.

CFDs give you the flexibility to take “long” positions (buy) if you believe the price of an asset will rise, or “short” positions (sell) if you expect the price to fall. Another important use of CFDs is the ability to hedge your securities portfolio against market volatility.

How CFD trading works in practice

When trading CFDs, you do not actually buy or sell the underlying asset (such as a share, currency, or commodity). Instead, you buy or sell a number of units of the chosen CFD instrument depending on whether you expect its price to go up or down.

At EuroFinance, we offer CFDs on a broad range of financial instruments, including over 50 currency pairs, commodities, precious metals, shares of leading global companies, and major stock indices.

For each unit of price movement in your favor, you gain a profit multiplied by the number of CFDs you hold. Conversely, if the market moves against you, you incur a loss.

Margin and leverage

CFDs are margin products, which means you only need to deposit a fraction of the total position value in order to open a trade. This is called leverage or margin trading.

Margin trading is a “double-edged sword”: it allows you to increase potential returns on winning trades, but at the same time, losses grow proportionally because profit and loss are calculated on the full notional value of the position. There is a real risk of losing your entire deposit.

How CFD margins are calculated

To open a CFD position, you must deposit a margin — a percentage of the total notional value of the position. This percentage is known as the required margin, displayed as “Margin” in our trading platform.

For example, if you wish to open a position in EUR/USD with a notional value of 0.10 lots (10,000 EUR) and the applicable leverage is 1:30 (3.33%), you would need to deposit EUR 333 (or the equivalent in another currency).

As this example shows, margin trading enables you to control a large position with a relatively small deposit. However, this also means that potential losses are magnified and could exceed your deposited amount.

Costs of trading CFDs: visible and hidden

Spread: The spread is the difference between the buy (ask) and sell (bid) price. You open a long position at the ask and close it at the bid. The narrower the spread, the sooner the market needs to move in your favor for you to make a profit. Our spreads are always competitive.

Overnight financing (swap): At the end of each trading day (23:59:59 Bulgarian time), open positions may be charged or credited with a financing adjustment known as a swap. Depending on your position (long or short) and the interest rate of the instrument, swaps may be positive or negative.

Real-time market data fee: Some brokers charge clients for access to live market data (for example, stock quotes). At EuroFinance, we do not charge such fees.

Commission (for equities only): Trading CFDs on shares carries a fixed commission of 2 currency units (depending on the denomination of the underlying).

Example 1:
Opening a long position of 1 lot (100 units) CFDs on Facebook shares at USD 190 (notional value USD 19,000) would incur a commission of USD 2.

Example 2:
Opening a short position of 0.1 lots (10 units) CFDs on Deutsche Bank shares at EUR 7 (notional value EUR 70) would incur a commission of EUR 2.

Note: Commission is charged both when opening and closing a CFD share position.

What instruments can be traded?

With EuroFinance, you can trade CFDs on:

Over 50 currency pairs
Precious metals and oil
Leading global stock indices
Shares of more than 200 world-renowned companies, such as Apple, Google, Facebook, Amazon, Netflix, Adidas, Shell, UniCredit, and many others.

Spreads start from 0.8 pips (EUR/USD). For the US500 index, spreads start from USD 0.50.

Example of CFD Trading

Buying CFDs on shares in a rising market (“long” position):

Suppose Company X shares trade at EUR 50.00 / EUR 50.50 (spread = EUR 0.50). You believe the price will rise and buy 3 lots (300 units) of CFDs at EUR 50.50. The notional value of your position is EUR 15,150. With an initial margin requirement of 20%, you must deposit EUR 3,030.

Scenario А:

Winning trade: If the price rises to EUR 60.00 / EUR 60.50, you close at EUR 60.00. Profit = (EUR 60.00 – EUR 50.50) × 300 = EUR 2,850, minus commissions of EUR 4 = net profit of EUR 2,846.

Scenario B:

Losing trade: If the price falls to EUR 43.00 / EUR 43.50, you close at EUR 43.00. Loss = (EUR 50.50 – EUR 43.00) × 300 = EUR 2,250, plus commissions of EUR 4 = total loss of EUR 2,254.

Short selling CFDs in a falling market

CFDs allow you to profit from falling prices by selling an instrument you do not own (“short selling”). If the market moves as expected, you can buy back the instrument at a lower price and realize a profit. If the market rises instead, you incur a loss. Again, there is a real risk of losing your entire margin.

Hedging a securities portfolio

If you already hold securities in your investment portfolio and expect a short-term decline due to adverse market conditions, you may use CFDs to hedge. By opening a short CFD position on shares you own, you can offset potential portfolio losses with gains from the CFD position.

For example, if you hold EUR 10,000 worth of Company Y shares, you could short the same amount in CFDs. A fall in the share price would reduce the value of your portfolio but could be offset by gains from the CFD position. When you believe the downward trend has ended, you can close the CFD short and lock in your gains.

Hedging with CFDs is a widely used risk management strategy, particularly in times of market volatility.

What are Contracts for Difference?

Contracts for Difference are derivative financial instruments that allow you to speculate on the price movement of underlying assets such as shares, indices, commodities, and currencies.

A CFD is an agreement to exchange the difference in the price of an asset between the time the contract is opened and when it is closed. Holding a CFD does not give you ownership rights to the underlying asset — only exposure to its price movement.

CFDs are leveraged products. This means you only deposit a fraction of the position’s notional value, but profit and loss are calculated on the full amount. While leverage amplifies gains, it also magnifies losses, and there is a significant risk of losing your entire investment.

With EuroFinance, you can trade CFDs through MetaTrader 5, the most popular CFD trading platform worldwide, with access to hundreds of instruments, competitive trading conditions, and professional support 120 hours a week.