What is CFD Trading?
When you trade with Plus500 you are trading on a Contract for Difference (CFD). A CFD is a financial derivative that is monitored closely by financial regulators. When you Buy or Sell a CFD you enter a contract with the CFD issuer. You are not buying or selling the asset, but are entering a contract which allows you to potentially benefit from the price movement of that asset. In other words, two parties enter into an agreement to trade on the price difference between the entry price (either Buy or Sell) and the closing price. For a Buy contract, if the trade’s closing price is higher than the opening price, then Plus500 will pay the Buyer the difference, and that will be the Buyer’s profit. If, however, the trade’s closing price is lower than the opening price, then the Buyer will pay Plus500 the difference, and that will be the Buyer’s loss.
For a Sell contract, the opposite is true, i.e. if the trade’s closing price is lower than the opening price, then Plus500 will pay the Seller the difference, and that will be the Seller’s profit. Conversely, if the trade’s closing price is higher than the opening price, then the Seller will pay Plus500 the difference, and that will be the Seller’s loss.
In other words, if you believe the price is going to rise, you would rather buy (also known as Go Long), or if you believe the price is going to fall, you would better sell (Go Short). Some of the reasons CFDs are attractive to traders are:
- The ability to Go Short (Sell) which is not always as straightforward in the physical financial market.
- Access to leverage* - meaning you can use borrowed capital in the expectation of making higher profits (or losses).
- Straightforwardness - there is no need to actually own the underlying financial asset.
In addition, with CFDs, you can normally open a contract for smaller amounts than you could in the underlying physical market. For instance, you can trade on a fraction of Bitcoin**, as opposed to purchasing a whole Bitcoin, or several barrels of Oil (rather than 5,000 barrels - the normal contract size - in the physical market).
*Leveraged trading activity involves substantial risks for losing all of the invested funds in a short time period.
**Subject to operator.
CFDs traders do not hold any tangible assets
With CFDs you can speculate on price changes of an underlying asset without having to actually purchase it. The name of this type of product explains what it is: a contract designed for the trader to profit from the difference in the price of an asset between the opening and closing of the contract. The price or value of a CFD mirrors in real-time the price movements of the underlying physical asset.
With CFDs, you do not need to deposit the full value of the asset to open a position. Instead, you can just deposit a percentage of the total amount. This deposit is known as ‘Margin’ and makes CFDs a leveraged financial product. Leverage amplifies the gains of the contract, but similarly can amplify any losses.
Plus500 offers most of its services free of charge, and is upfront with the few fees it does charge. There are no surprises. The company’s compensation structure is derived from the Bid/Ask spreads (i.e., the difference between the Buy and Sell prices quoted on the platform). For details on the few fees and charges that Plus500 charges, click here.
Spread
The “Spread” is the difference between the “Buy” price and the “Sell” price on an instrument at a particular time. On the Plus500 platform, you will come across two types of spreads: (1) Dynamic Spread; and (2) Spread. A “Dynamic spread” is constantly adjusted according to the market spread during the period a position is open. A Spread does not typically change in line with general market fluctuations while a position is open, but when the market is volatile and illiquid, may change to a new level so that the underlying market conditions are better reflected. Nevertheless, Plus500 aims to provide the tightest possible spreads at all times.
You should always check the applicable spread type and make sure you are aware of an instrument’s properties before you start trading. Information regarding the spread for a given instrument can be found on our website or trading platforms in the “Details” link next to the instrument’s name.
Margin
CFD traders do not need to deposit the full value of a contract to open a position. Instead, only a portion of the total amount is needed. When trading CFDs, one can trade on margin using leverage*. In order to open and maintain a position, initial and maintenance margin levels must be met. Both the initial and maintenance margin level requirements are specific to each financial instrument.
*Leveraged trading activity involves substantial risks for losing all of the invested funds in a short time period.
Trading & Platform Mediums
The Plus500 platform is available for CFD online trading in a few different mediums. Traders can access the platform on Apple and Android devices. It is best to have the latest version of your device’s software (iOS or Android) to ensure all our services function correctly. The platform is also accessible with our WebTrader on desktop and Windows 10 Trader.