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100:1
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RISK WARNING: CONTRACTS FOR DIFFERENCE (‘CFDS’) ARE COMPLEX FINANCIAL PRODUCTS THAT ARE TRADED ON MARGIN. TRADING FOREX AND CFDS CARRIES A HIGH LEVEL OF RISK SINCE LEVERAGE CAN WORK BOTH TO YOUR ADVANTAGE AND DISADVANTAGE. AS A RESULT, FOREX AND CFDS MAY NOT BE SUITABLE FOR ALL INVESTORS BECAUSE YOU MAY LOSE ALL YOUR INVESTED CAPITAL. YOU SHOULD NOT RISK MORE THAN YOU ARE PREPARED TO LOSE. BEFORE DECIDING TO TRADE, YOU NEED TO ENSURE THAT YOU UNDERSTAND THE RISKS INVOLVED TAKING INTO ACCOUNT YOUR INVESTMENT OBJECTIVES AND LEVEL OF EXPERIENCE. PAST PERFORMANCE OF FOREX AND CFDS IS NOT A RELIABLE INDICATOR OF FUTURE RESULTS. MOST CFDS HAVE NO SET MATURITY DATE. HENCE, A CFD POSITION MATURES ON THE DATE YOU CHOOSE TO CLOSE AN EXISTING OPEN POSITION. SEEK INDEPENDENT ADVICE, IF NECESSARY.

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Contracts for difference (CFDs) provide a flexible way to trade on the price movements of thousands of global financial products such as shares, indices, commodities, currencies and treasuries.


Definition

A contract for difference, otherwise known as a CFD, is an agreement between two parties (investor and CFD provider) to exchange the difference between the opening and closing price of a contract. CFDs are derivative products that allow investors to make assessments of rising and falling markets, including forex, indices, metals, commodities, treasuries and shares.

CFDs are a leveraged product and can be used as a hedging device to offset losses incurred in your physical portfolio of shares. CFD trades are free from stamp duty and through Prime Markets, you will have access to some of the tightest spreads, lowest margins and competitive commission rates.

How To Trade CFDs

In the same way as traditional trading, there will be a bid and an offer price. In order to complete a round turn, both a buy and sell action must occur. If you anticipate that the value of a market will increase, you will Buy to open and later Sell to close. If you close at a higher price than the opening, then you will make a profit, however if you close at a lower price then you will make a loss. When you Sell to open, then it would be the same process however the opposite way around. Therefore you would be aiming to BUY back at a lower price than the one that you opened at in order to be profitable on the trade.

A CFD will be traded in the underlying currency of the symbol, unless otherwise specified on our market information sheet.

Example Of An Index CFD Trade

There is a major data event in the US. You anticipate that US indices should rally following this event and you want to buy 100 Dow Jones US 30 CFDs at the offer price of 17805.00. Each point movement will equate to a 100 USD profit or loss. Assuming 500:1 leverage, the margin required to open this position is (17805.00*100)/500 = 3561.00 USD.

Huge volatility is expected following the release of the data. You do not set a stop-loss or take-profit orders, but instead you intend to close the position shortly after the data release event. When the data is released, there is major buying activity and a subsequent increase in the value of the index. The market bid price is now quoted at 17900.00 and you decide to close your position.

To calculate your profit, you calculate the difference between the opening and closing price, multiplied by the number of CFDs you held. (17900.00 - 17805.00) * 100 = 9500.00 USD.

Calculating Margin

CFDs are a leveraged product so you are able to enter a trade with greater exposure than what you would do if you were to hold the actual stock for example. Whilst this can result in significantly larger gains if the market moves in your favour, you need to consider that if the market moves against you, it will increase your potential losses accordingly.

When the margin requirement is given as a percentage, you need to multiply the price by the quantity, then multiply by the margin percentage. When the margin is given as a ratio; multiply the price by the quantity and then divide by the leverage.

For example if MSFT is trading at $45 and you buy 1000 CFDs at a 5% margin requirement then you will do the following calculation: $45*1000 = $45,000. $45,000 * 5% = $2,250.

Daily Funding Charges

Daily funding charges will be applied for all products that are not futures contracts. It reflects that this is a daily product that has been moved to the next day and not a futures product where the spread would be wider to incorporate these costs.

Prime Markets offer a financing rate of 250 basis points. The financing cost will be the exposure of your trade, multiplied by our rate, above or below LIBOR. You will + LIBOR for long positions, and - LIBOR for short positions. To calculate the daily charge, it can then be divided by 365 or 360, depending on the market traded.

The following calculation can be used: (Price * Quantity) x (2.5 +/- LIBOR) / number of days.

Please note that although you may expect to receive financing on short positions, global interest rates are currently so low that you are likely to still be charged. As interest rates rise, short positions may receive funding. Long positions will always incur this charge.

Dividend Credits And Debits

All CFDs will be liable for dividend adjustments, this is because when a stock pays a dividend, it will affect the price of the share and any index it is associated to. Each stock will normally pay a dividend twice a year however, since you do not own the shares, you will be adjusted for the dividend amount to counteract the price movement. This means that you are neither advantaged nor disadvantaged by dividends when trading a derivative product.
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