All you need to know about CFD Trading

22 Oct 2021

What is a Contract for Difference (CFD)?

CFD is an agreement between two parties to settle the difference between the opening and closing prices of the contract multiplied by the number of units of the underlying asset specified in the CFD. CFDs allow customers to participate in the price movement of an underlying product without actually owning the asset, such as shares, indices, commodities, currencies and treasuries.

Phillip Futures offers the following types of CFDs:

  • Global Indices CFD
  • Commodities CFD
  • Share CFD
  • Cryptocurrencies CFD

How is the CFD quoted?

CFD prices are derived from prices of the reference instrument quoted in the underlying exchange, market or liquidity provider. Therefore, CFD prices will only be available if the underlying exchange or market is open or if there is sufficient liquidity.

Why trade CFD?

  1. Small barrier to entry

    CFDs typically have smaller and affordable contract sizes. This means that traders will be able to enter into a CFD contract with a modest amount of capital, and trade as small as one share!

  2. Trade in both bull and bear markets

    The ability to enter a long and/or short position allows traders to take advantage of both rising and falling markets.

  3. No expiration date or risk of delivery

    Unlike futures which commonly have a fixed expiration date, CFDs allow traders to perpetually hold the position(s). CFDs are cash settled, hence there is no need to worry about the delivery of the underlying asset.

  4. Zero-Commission

    Trade CFD with competitive spreads at zero-commission. No need to pay a commission rate for each trade placed.

  5. Capital Efficiency

    CFD contracts are leveraged to enable trading on margin. The amount of initial margin required to place a new trade is only a small percentage of the total contract value. As leveraging provides customers with the ability to utilize a small amount of capital to control a large amount of assets, customers need to be aware of the risk of leverage trading.

  6. Hedged Position

    Holding opposite (i.e. long and short) positions of the same CFD contract simultaneously without closing out each other is referred to as a “Hedge”. The ability to hold hedged positions offers opportunities to take advantage of differences in directional view across the short and long term.

Cost of Trading Shares CFD

Cost comparison between trading shares vs shares CFD:

Costs of Trading SharesCosts of Trading Shares CFD on Phillip MT5
CommissionsCommissions
Platform FeePlatform Fee
Exchange FeesExchange Fees
Spreads
Swaps

Spreads: Difference between the ask (buy) and bid (sell) price.

Swap/Overnight financing charges: Costs incurred for holding a position from one day to the next, factoring in your financing/borrowing charges. Swap are variable and is shown on MT5 platform.

Example 1: Costs Involved Trading Shares

Buy Tesla shares using T Broker and hold it for 5 days before selling. Costs as below:

TypeChargesCharged By
Commission0.5% / Share
Min. USD 1 / Order
T Broker
Platform Fee0.5% / Share
Min. USD 1 / Order
T Broker
SEC Membership Fee (Charged for sell orders only)0.00051% * Trade ValueSEC (U.S. Securities and Exchange Commission)

If Tesla trades at:  Bid: 604.10 l Ask: 604.50

Cost of buying 1 Tesla share:

Commission:          0.5% X $604.5 = $3.02
Platform Fee:          0.5% X $604.5 = $3.02
Subtotal:          $3.02 + $3.02 = $6.04

After 5 days, selling Tesla at $610.00/share:

Commission:          0.5% X $610 = $3.05
SEC Fee:          0.00051% X $610 = $0.003
Subtotal:           $3.05 + $0.003 = $3.053

Total P&L = Capital gain – Cost

=           $5.50 – $9.093
=           -$3.593

Shares were sold at a profit but the trade did not breakeven and incurred a loss of -$3.593 as the costs were higher than the capital gain.

Example 2: Cost Involved Trading Shares CFD on Phillip MT5

If Tesla CFD trades at: Bid: 623.354 l Ask: 623.571

Spread0.217 = (623.571-623.354)
Swap Fees5 days X 1 shares X $0.051 = $0.255
Calculated as: Days held * No of shares * Swap Rate (long or short)

Total cost =          Spread + Swap

                   =          $0.217 + $0.255

                   =          $0.472


Total cost incurred would be $0.472 for trading 1 Tesla CFD. As cost of trading CFD is low, it does not take large capital gain to breakeven a trade.


Illustration: Trading Shares

Justin is a University student who is interested in the stocks market. He has some excess savings of $2500 received from working as a part-time job. Recently, as he was browsing the stock market, he noticed that the stock Tesla (TESLA-NDAQ) was undervalued and is currently trading at $604.

Justin decides to trade the stocks by getting in now and aims to get out when the price hits its fair value of $604. However, with only $2500, he could only buy 4 Tesla shares.

Let’s assume 5 days later, Tesla share rose to $620.

Scenario 1: Buying 4 Tesla Shares

Buying 4 Tesla shares at $604 each, totalling $2416
Commissions for buying: $2

5 days later…

Sell the 4 Tesla Shares at $620 each, totalling $2480
Commissions for Selling: $2

P&L: $2480 – $2416 – $4 ($2 x 2) = Profit $60

*Assuming that commission is $2.00 and there are no exchanges fees for US stocks.

Illustration: Trading Shares CFD

Justin has 2 choices, first buy only 4 Tesla CFDs similar to the amount he would have bought if he purchased shares. Second, maximise his $2500 and buy 13 Tesla Shares. Let’s look at both!

Scenario 1: Buy 4 Tesla CFD

Buying 4 Tesla shares at $604 each, totalling $2416
As the initial margin required for Tesla CFD is 30%, Justin only needs to outlay 30% of the cash to purchase this 4 Tesla Shares. (Lower capital is required to initiate a trade).

Initial Margin 30% X $2416 = $724.80 Initial Deposit
Commissions for buying: $0

5 days later…

Sell the 4 Tesla Shares at $620 each, totalling $2480
Commissions for Selling: $0
Swap Fees: 5 days X 4 shares X $0.051 = $0.408
Calculated as: Days held * Lot Size * Swap Rate (long or short)

P&L: $2480 – $724.80 – $0.408 = Profit $1754.80

In essence, when Tesla moves in Justin’s favour and increases to $620, he would have gained $2480 with just a $724.80 outlay, which equates to a 242% gain. Without leveraging, he would have put in $2416 upfront and with a $64 gain, he will only be getting a ROI of 2.6%.

Now suppose Justin wants to maximise his entire $2500 savings…

Scenario 2, buy 13 Tesla CFD

Buying 13 Tesla shares at $604 each, totalling $7852
As the initial margin required for Tesla CFD is 30%, this means that Justin only needs to come out 30% of the cash to purchase this 13 Tesla Shares. (Essentially you require lesser $$ make your buy!)

Initial Margin 30% X $7852 = $2355.60 Initial Deposit

Commissions for buying: $0

5 days later…

Sell the 13 Tesla Shares at $620 each, totalling $8060
Commissions for Selling: $0
Swap Fees: 5 days X 13 shares X $0.051 = $3.315
Calculated as: Days held * Lot Size * Swap Rate (long or short)

P&L: $8060 – $2355.60 – $3.315 = Profit 5701.08

What is Margin?

Margin is the collateral that an investor has to deposit with their broker or an exchange to cover the credit risk the investor poses for the broker or the exchange. It can be broken down into Initial Margin and Maintenance Margin.

Initial Margin: Amount required as a deposit when initiating a position.

Maintenance Margin: Amount required to maintain that position.

Example:

Tesla CFD Initial Margin is 30% and Maintenance Margin is 20%.

If Tesla CFD is currently trading at $604, deposit required to initiate a buy/sell position = $181.20.

Account needs to have at least $120.80 (20% MM) at all times during the open position. Shall the account balance go below the MM, margin call will be triggered and account holder must top up to the initial margin level to avoid auto liquidation of the position.

Scenario 1: Buying 4 Tesla Shares

Buying 4 Tesla shares at $604 each, totalling $2416
Commissions for buying: $2

5 days later…

The 4 Tesla Shares are valued at $550 each, totalling $2200
Justin decides to cut-loss and sell
Commissions for selling: $2
P&L: $2200 – $2416 – $4 = Loss $220
ROI: -220 / 2416 = -9.1%

Scenario 2, buy 4 Tesla Shares CFD

Buying 4 Tesla shares at $604 each, totalling $2416
Initial Deposit: 30% margin X $2416 = $724.80
Commissions for buying: $0

5 days later…

The 4 Tesla Shares are valued at $550 each, totalling $2200

This would result in a loss of $216 and the initial margin (amount deposited) that Justin has left is $724.80 – $216 = $508.80

Justin decides to cut-loss and sell

Swap Fees: 5 days X 13 shares X $0.051 = $3.315
P&L: $508.80 – $724.80 – $3.315 = Loss $219.31
ROI: – 219.31 / 724.80 = -30%

Therefore, trading CFD magnifies both your profits and losses.


Shares CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allows traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    CFDs typically have flexible and smaller contract sizes. This means that traders will be able to enter into a CFD contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFDs allow traders to perpetually hold the position(s). CFDs are cash settled, no need to worry about the delivery of the underlying asset.

Trade US, HK, SG Shares CFDs at zero commission on Phillip MetaTrader 5, a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

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What’s more? Phillip MT5 is now supported on Mac OS! To install, simply download the file below and complete a simple installation process.

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