What is a contract for difference (CFD) in trading?

When you trade using a foreign trading application service such as AvaTrade or Tradingview, you must be aware of a trading instrument called CFD as many foreign trading applications provide this instrument.

only in Indonesia Only a few companies offer CFDs as trading instruments such as Pluang, Global Kapital Investama, Mentari Mulia Berjangka, DC Futures, etc. So what are CFDs and how are they different from other trading instruments? Check out the full review below:

Definition of CFDs

Contracts for difference (CFD) are Derivatives in the form of a contract that requires the trader to estimate whether the price of the underlying asset (Underlying Assets) The instrument will increase or decrease during the term of the contract.

If the estimate is correct The broker will give some money as a form of profit. On the other hand, if the trader’s estimates are wrong. He had to pay the CFD Broker a certain amount in the form of a loss.

As mentioned above, CFDs are derivatives or financial instruments that are valued based on the price movement of other financial instruments such as stocks, bonds, forex, etc. Therefore, there are many types of CFDs, ranging from stock CFDs, CFDs. bonds, etc. This also means that buying CFDs on an asset doesn’t mean you own the underlying asset.

CFDs are typically traded online via an application or website. This is because the price movements of these instruments tend to be rapid. Due to the speed of transactions and the type of derivative assets. This is what makes CFDs such a high risk instrument. and generally traded by seasoned traders.

Are CFDs legal in Indonesia?

Derivatives trading regulations in Indonesia are generally regulated in CoFTRA Regulation No. 109/Bappepti/PER/01/2014 Derivatives Contracts in Alternative Trading Systems. therefore also limited

CFD trading regulations differ from country to country, for example in the United States. This instrument is prohibited from being traded by retail traders from that country. but foreign traders (Non-US person) can do it.

In other countries such as Australia, the UK, Russia and South Africa, trading CFDs is legal, although there are some restrictions. meanwhile In Indonesia, there are no strict regulations governing the trading of this instrument.

How do CFDs work?

Like stocks and other financial instruments, CFDs are also traded using bid and ask prices. For example, the CFD price for ABC stock is sold at $100 per share. The trader therefore buys 1000 CFDs or 100,000 in total.

It is slightly different from trading other instruments. The level of leverage in CFD trading is relatively higher. in trading this instrument Traders may only be required to deposit 5% of their total CFDs used, so traders in the above case can only deposit 5000$ as a margin.

A trader predicts that the price of the ABC Stock CFD in 1 week will increase by up to 5%. If the forecast is correct and the price of the ABC Stock CFD sells for $105 per share or $105,000 in total, he will make a profit of $5000. Stock CFDs actually drop 1% when the contract expires. The trader will incur a loss of $1 per share or $1000.

Fees for trading CFDs

There are 3 types of fees that CFD traders have to pay. 3 types of costs are spread costs. commission and financial costs spread It is a fee charged by the broker for the difference between the buying price of an instrument and the selling price of the instrument. Usually, the more crowded the asset market and the larger the trader’s transaction value. The lower the spread you have to pay.

The commission is usually the cost of maintaining the account if the trader is not trading, however in many cases the commission is charged even if the trader is actively trading. While forex or commodities trading there is no such fee.

A financing fee is a fee that a trader pays if he holds an investment instrument for more than 1 day. The trader is usually charged a certain percentage of interest every day when he holds the asset.

Advantages of trading CFDs

1. High leverage

as mentioned above Trading CFDs generally offers a higher level of leverage compared to other instruments. This means that traders only need a small deposit to trade this instrument. while the rest is borne by the broker.

The high level of leverage indicates that there is also a high profit potential that traders can enjoy. but vice versa If the trader loses The amount of losses will also be higher. In the example above, for example, with a margin of 5%, an investor can gain up to 100% of his capital or lose 20% of his capital or even 100% of his capital.

2. Access to foreign investment instruments

CFDs are generally offered by offshore brokers. Therefore, the underlying asset used as a basis is also a foreign investment instrument. For example, Pluang, although this company is located in Indonesia. But this company offers CFDs based on US stocks.

3. Short circuiting is easier.

shorts or short selling It is a trading transaction where the trader buys an asset expecting its price to fall. in other investment instruments The short seller must borrow a certain amount of assets from the broker over a period of time before they can resell them. The advantage of this transaction is when the trader can return the asset borrowed from the broker at a lower price due to the decline in value.

In CFD transactions, this shortening does not work. The reason is that the trader does not need to borrow assets from the broker to open a position. So he can trade anytime and anywhere.

Disadvantages and risks of trading CFDs

1. Traders have to pay the spread.

Regardless of profit or loss, CFD traders still have to pay spreads. The presence of spreads requires traders to estimate the optimal time to sell CFDs so that the amount of profit earned is greater than the amount of spread paid.

2. Regulations

CFDs are trading instruments with weak regulation in many countries. in general Brokers who provide these instruments are selected solely based on their performance and reputation. compared to the regulations they follow. Therefore, before trading this instrument. Make sure you choose a broker and The best forex trading apps and platforms..

3. Risk

The fact that the CFD market moves so fast There are no underlying assets that can be owned. And the lack of regulation makes CFDs a high-risk trading instrument. Trading this instrument is not recommended for beginners.