WHAT IS A CFD?
CFD stands for ‘Contract for Difference’. CFDs are commonly offered on commodities, forex, indices and shares. CFDs are derivatives classified as complex and risky. All of these instruments derive their value from the underlying asset. This means that as a derivatives trader you never actually own the underlying asset but trade on movements in the price of the asset instead.
WHAT DOES CFD ON COMMODITIES, INDICES AND SHARES MEAN?
A CFD is an agreement to trade the difference in the value of an underlying asset between the time the contract is opened and the market value at the time that it is closed. In case the value of the underlying asset rises, the buyer receives profit and vice-versa for the seller. In case the value declines, the buyer suffers a loss and vice versa for the seller. Tao Trade offers OTC CFDs that exist as a private contract between Tao Trade and the trader.
WHAT IS FOREX?
Forex = Foreign exchange. Trading on Forex means buying and selling currencies. When you place a forex trade, you are buying one currency and selling another at the same time or vice versa. You decide on whether to buy or sell based on whether you think the currency will go up or down.
WHAT IS A SPREAD? (TRADING CONDITIONS)
The Spread shows the commission cost that you pay depending on the size And underlying asset of the executed order. You will be charged at the beginning of the trade and the trade will begin at a minus balance equal to the corresponding spread commission amount.
If you open a BUY position (by clicking on ASK), the trade will be opened at ASK rate but the market rate will be the corresponding BID rate. Likewise, if you open a SELL position (by clicking on BID), the trade will be opened at BID rate but the market rate will be the corresponding ASK rate.
If you want your trade to be profitable, the spread/commission must first be covered by the market price before the trade begins to produce a profit.
In case you decide to close a position immediately after opening it, the cost incurred would be equal to the corresponding spread calculation for that position.
A “Trading Simulator” feature is available on our PROfit platform when you log in to your trading account.
EXAMPLE OF SPREAD CALCULATION ON A CURRENCY PAIR
BUY EURUSD 100,000
BID price 1.2000
ASK price 1.2003
Spread = 0.0003
100000 X 0.0003 = $30 USD (spread is calculated using the variable currency of the position, in this case USD)
EXAMPLE OF SPREAD CALCULATION ON A COMMODITY
SELL Crude Oil 1000 barrels
BID price 50.00
ASK price 50.06
Spread = 0.06
1000 X 0.06 = $60 USD (spread is calculated using the variable currency of the position, in this case USD)
EXAMPLE OF SPREAD CALCULATION ON CRYPTOCURRENCIES
BTCUSD price $9,900
9,900 X 5% = 495.00
Spread = $495.00 USD
WHAT IS SYNTHETIC DERIVATIVES SPLIT/REVERSE SPLIT PRICE ADJUSTMENT
A price adjustment on synthetic derivatives takes place when the value of the Synthetic Derivative reached a pre-defined level of its original value in order to correct its price. For example, for an instrument with a “Synthetic Derivative value at inception” 1000:
- If the leveraged symbols value reaches a value of 100, a reverse split event is implemented and in the following weekend the price will reset to 1,000.
- If the leveraged symbols value reaches a value of 10,000, a split event is implemented and in the following weekend the price will reset to 1,000.
- In order to avoid a difference in your position’s value due to the Reverse split or split of the Synthetic Derivative, a different open price may be implemented by the system to reflect the market fluctuation between the old and new price. In such a case your account equity will not be affected. Please note that any existing Stop Loss or Take Profit, will not be transferred to the new related positions.
Synthetic Derivatives are complex and risky products due to the complex methodology behind their price calculation. Synthetic Derivatives are subject to Corporate Events which may occur under the following circumstances:
- If the value reaches below 50 then a reverse split is carried out on the product.
- If the value closes at greater than 10,000 then a split is carried out on the product.
In case of a reverse split after the adjustment of any transaction, if the position size will be equal to or less than 0.01, then the Company will close the relevant transaction at the last available market rate and will realise the Profit & Loss.
You must read our Key Information Document on Synthetic Derivatives for information related to this product’s methodology, performance scenarios and risks involved.
If you want to learn more about account types and their spreads in value, click here.
Trading CFDs is risky and it is highly recommended to obtain familiarity and experience before you start trading. In case you do not have any familiarity or experience, trading CFDs may not be appropriate for you. For the full risk disclaimer, please click here.