CFD Explained

CFD - Contract for differencesCFD, or Contracts for Difference, is a financial instrument similar to an index or share which allows you to trade an underlying index, share or commodity contract without having to own the underlying asset itself. The CFD price is the price of the underling asset (whether it is a share, index, or future). If the price of the underlying asset goes up, so will the price of the CFD. A major difference is that there are no exchange fees and many of the inefficiencies of trading the underlying shares on the exchange are eliminated. Also, CFDs allow you to use the power of leverage which is not generally available in equity products. As a result, CFDs have grown in popularity dramatically over the past few years.

Ava Index offers CFDs with zero commissions and very attractive margin requirements.

Contracts for Difference (CFD) are traded on margin, using leverage to maximize your trading capital. AvaFx offers at least 20 times leverage on your invested capital.

  • No fees or commission – so your profit stays in your hands.
  • You can Buy or Sell the contract so you can profit from falling or rising markets.
  • A single account can give you access to stock indices, Oil, Gold, Silver, and of course a wide range of forex pairs. You can instantly use your gains from one trade to open new positions in other markets, or to diversify your investments across a number of different markets.
  • You can manage your risk using Stop Loss and Limit orders .We also provide Trailing Stops , Entry orders and much more. Please try our demo or talk to an account executive about the many tools we provide free of charge.

How to trade an Index?

Although Indices are not quoted like ordinary equity shares with a BID and ASK price, Ava’s CFD Indices  quote a BID and ASK price and allow you to trade indices as a CFD.
Example: The FTSE 100 is currently trading at 6320.50 and Ava is quoting a spread of £6319.50 (Sell) – £6322.00 (Buy) on the FTSE.
The Buy price of 1 CFD is £6322.00. Ava provides you with 20:1 leverage so instead of having to use £6322.00 of your money to buy one FTSE100 actual index; you can buy one FTSE100 CFD contract with £300 and the remainder we provide to you as leverage. So with £6322 you can buy 20 FTSE 100 CFD contracts, instead of just one index.

How to calculate profits/losses

CFD:

Investor A believes that the FTSE 100 is going to rise and buys 3 Index CFDs at £6322.00 each, for a total value of £18966.00. The margin required (deposit required) is just £900.

  • A week later the FTSE has risen and the daily FTSE spread is now £6422.00 (Sell) – £6424.50 (Buy).
  • The investor decides to close his position at a sell price £6423.00
  • The premium charges where -$1.69 per index per night.
  • Therefore, the total cost of carrying this investment is: (7 nights) * (3 indexes) * (1.69$) = -$35.49, or approximately £18.05.

The profit on the trade is calculated as follows:

Opening Level £ 6322.00
Closing Level £ 6422.00
Difference £ 100.00
Profit on trade,(£100 x 3) £ 300.00
Cost of Carry £18.05
Total Profit on trade £ 281.95

How to limit my risk when trading CFDs?

When trading CFDs you can place stop loss orders which can help protect your investment if the market moves against you. Other order types offered online include: Market orders, Limit orders (take profits), Stop-loss orders, trailing stop loss orders, If Done orders, and OCO (One Cancels the Other) orders. You are able to place and amend these orders free of charge. Under abnormal market conditions, a stop loss order may not be executed at the exact price that you specify.

What are the financial costs of CFD trading?

Trading in AVA Index requires no trading commissions, fees, Stamp duties, or management costs.The only cost is the Spread between the buy and sell prices. AvFx Spreads are very low and competitive, so that our clients can enjoy the best returns on their trades. Because CFDs are traded on margin, if you hold a position open overnight it will be subject to a rollover charge. Long CFD positions are charged rollovers if they are held overnight, Short CFD positions will be paid rollovers.

What happens when the CFD rolls between Futures Contracts?

CFDs are based on underlying assets, which are Futures Contracts. They will be rolled a few days before the futures contract’s expiry date to the next Futures contract. Your CFD does not have an expiry date, however. When the futures contract is about to expire and we roll over to the next month’s contract, you will be debited / credited with the difference in value between the old and the new contracts. Note that these monthly rolls in the reference price will not affect your P&L – any necessary adjustments will be made to compensate for changes in price due to a roll.

For example:
The current Crude Oil price at expiry is $110.00. the next contract price is $111.00, so there is a difference of $1 per CFD. A client who bought the CFD will be charged $1 per contract, and a client who sold the CFD will be credited $1 per contract on the day that the contracts roll. In the case that the contract price goes down on the rollover date, the opposite actions would be taken: a short position would be charged and a long position would be credited.

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