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What does CFD stand for?
CFD stands for Contract for Difference.
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Are there any benefits for buying a CFD over the underlying asset?
Yes, there are. Since CFDs are traded with leverage through leverage, there is a lower level of capital employed to control an equivalent stake. What's more, with a CFD account, a trader has access to multiple markets which usually require multiple accounts to access.
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Is there more risk involved in buying a CFD over the underlying asset?
Higher leverage also means greater risk. Depending on the level of margin used, small moves in the underlying could generate significant changes in an account balance.
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Do I have control of the underlying when trading CFDs?
No. The CFD merely tracks the underlying price. It does tender rights or dividends associated to the underlying asset.
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Are multiple accounts required to trade different types of CFDs?
An FXCM CFD account provides access to Equity Indexes, Commodities and Fixed Income.
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Where do the prices for CFDs come from?
CFD prices are derived from the assets underlying index constituent shares or spot product.
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What is margin?
Margin is collateral a trader posts in order to control a larger position size. Margin allows an investor to put up only a percentage of a CFD's full value thereby letting them control a larger position with less capital. (margin is also referred to as leverage)
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Can you lose more than your initial margin?
Yes. If a leveraged account is not managed correctly, a trader could lose more than their initial investment. For example, if a market is fast moving or gaps a position may not be able to be liquidated in time.
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What are the penalties for not being able to meet a margin requirement?
A trade will be held until an account's capital level reaches a certain level, whereupon the position will be liquidated.
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Are there initial and maintenance margin levels?
Under most circumstances, initial margin will be 1 percent of the full contract amount. There are no set maintenance margin levels.
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What are the costs and fees involved with trading CFDs?
Like futures, there are financing charges that are applicable.
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How does FXCM make its money?
FXCM makes its money on the bid/ask spread and being a market maker.
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How can I protect myself from suffering a negative account balance?
FXCM will not allow negative account balances. However, to avoid losing more than one's initial investment, a trader should manage their leverage, use stop losses and monitor their positions.
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Will my margin requirement be lowered should I attempt to hedge with similar products?
No. The imperfect nature of hedging with different assets is still prone to considerable risk.
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Will I receive credit for holding the underlying in calculation the margin?
No. Since the underlying is held through a different account, there is no way to confirm an accurate hedge.
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Are there expirations for CFDs?
No. A CFD contract will be treated like a cash product with no expiration. However, commodity and fixed income CFDs could be impacted when contracts roll over in the future market.
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Is CFD trading limited to certain hours?
Each market has its own defined trading hours. Peak hours typically coincide to specific exchange hours, and there are often off-peak trading hours when assets trade in the electronic market. To see the full specifications for each asset, see the CFD Trading Guide.
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Can I place trades when the market for a specific CFD is closed?
A CFD can be traded during its designated trading time (see the full specifications for each asset, see the CFD Trading Guide), but limit and stop orders can be adjusted even when trading is closed.
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What is the leverage on the CFD?
Index CFDs will provide leverage of 100 to 1.
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Are there limits to position size?
There are no limits to position sizing. Available margin is the only constraint on the size of a position.
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Are CFD profits unlimited?
FXCM will impose no limits to profit. Only position size will be a factor, which will be determined by the initial market requirement.
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Is there slippage?
Like most markets, CFDs are exposed to slippage. The level of slippage will be impacted by market conditions (liquidity) and position size.
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What are the minimum executable ticks for each product?
Under most conditions, the minimum tick for each CFD is similar to the underlying. To see the full specifications for each asset, see the CFD Trading Guide.
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What is the value of each tick worth?
To see the full specifications for each asset, see the CFD Trading Guide.
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How quick is the execution?
Execution in CFDs is comparable to the underlying. However, like the underlying, as position size increases, the greater will be the impact on execution.
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Can I hedge my CFD position?
Yes. CFDs can be hedged with their underlying. However, just like futures, there is often basis risk between the two.
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What are the benefits of using CFDs for an underlying hedge versus options or futures?
CFDs provide a linear payoff whereby a rise or decline in the underlying will result in an equivalent rise or decline in an account balance. Also, there are no initial premiums that need to be paid for in options. Another benefit to CFDs is that there are fewer restrictions and no need to obtain access to multiple exchanges.
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Is there a government regulator for CFDs?
Yes. CFDs are regulated in most countries that they are traded. To see the full specifications for each asset, see the CFD Trading Guide.
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In what countries is CFD trading allowed?
CFDs trade in Australia; the United Kingdom; the Euro Zone; Russia; Japan; Canada; South Africa; Switzerland; Canada; and New Zealand among other countries.
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Are there any accounting/tax advantages for trading CFD's?
Profit and losses in CFDs can be used to offset losses or profits in an underlying trade when used to hedge.
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What is the liquidity like in Equity CFDs?
Liquidity for CFDs is comparable to the underlying. Different indexes experience different levels of volatility and liquidity. To see the full specifications for each asset, see the CFD Trading Guide.
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What is the liquidity like in Commodity CFDs?
Liquidity for CFDs is comparable to the underlying.
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What is the liquidity like in government debt CFDs?
Liquidity for CFDs is comparable to the underlying.
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Does contract rollover affect CFDs?
Contract rollover will not have an impact on existing CFD positions, but it may lead to an increase in volatility for prices (just as it does in the underlying and futures market).
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What is the difference between trading Forex CFDs and mini Forex Contracts?
Nothing. These two products have properties similar to a cash based structure.
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Who primarily trades CFDs? Smaller investors or larger institutions?
Speculators and hedge funds are the typical market participants for CFDs.
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What is the most popular style of trading in CFDs?
As speculators and hedge funds are major participants in the CFD arena, speculation is by far the most popular method of trading. However, there is also considerable interest in hedging and pair trading.
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How are Fixed Income CFDs quoted?
Fixed Income CFDs are quoted by price as opposed to yield.
