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THE COMPLETE CFDs Guide

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CFDSDEFINITION

CFDs or Contracts for difference are agreements between you and the market maker which allow you to speculate on the changing values of a variety of underlying assets without having to take ownership of them. The underlying instruments cover a broad

spectrum and traders can choose from Foreign Exchange, Shares, Indices or Commodities.

Gains or losses are made based on how the underlying instruments prices change relative to the price at the initiation of the contract. When trading CFDs, you agree to exchange the difference in value of the CFD between when the CFD is opened and when it is closed. If you correctly predict the direction of an instruments price

movement, your account will be credited with the profits from this move. If you do not correctly predict the direction of an instruments price movement, your account will be

debited with the losses from this move.

CFD trades can be kept open for as long as the margin requirement are maintained or in the case of certain instruments, until expiry.

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TYPES OF INSTRUMENTS

FOREX

As we have seen, traders can choose from a variety of financial instruments to trade using CFDs, let us take a look at each of these assets and their different characteristics before moving on to examples of how Opteck allows you quick access to these markets;

The Foreign Exchange Market is a decentralized global marketplace for the trading of currencies, also known as the FX or Forex market, it is the largest and most liquid market in the world, with a daily turnover of over $5 trillion. Trading is divided into three main sessions: the Asian session, the European Session and the North American Session, which open one after the other throughout the day and overlap, ensuring that the market is operational 24 hours a day, 5 days a week.

When looking at a forex pair, you will notice that they are always quoted as two currencies, for example the EURUSD or the GBPUSD, the first currency in every pair is called the base currency, and this is the one that you are being given the value of. It is also the one on which you are performing the action of either buying or selling when trading Forex. The second currency is the quote currency, the figure quoted in an exchange rate is denominated in this currency. Essentially when you see an exchange rate, you are being informed what the base currency is worth in terms of the quote currency.

When looking at a forex pair, you will notice that they are always quoted as two currencies, for example the EURUSD or the GBPUSD, the first currency in every pair is called the base currency, and this is the one that you are being given the value of. It is also the one on which you are performing the action of either buying or selling

A EUR/USD exchange rate of 1.20 means that 1 euro is worth 1 dollar and 20 cents, or that $1.20 is required to purchase 1 euro. When purchasing 100,000 EURUSD at 1.20, you are said to be holding 100,000 EUR or 120,000 USD. When EUR/USD rises, this means that the euro is growing higher and/or the dollar is getting weaker. A move of the exchange rate to 1.33 would mean that your 100,000 euros are now priced at 133,000 USD and you have effectively made a profit of 13,000 USD.

Currency crosses are priced as 0.00000, and have increments known as pips and points. Therefore when the EURUSD moves from 1.34000 to 1.34001, we say the pair has moved 1 point, when the EURUSD moves from 1.34000 to 1.34010, we say the pair has moved 1 pip (10 points).

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SHARESAlso known as a stock or equity, a share is a tradable security which grants the purchaser ownership of a fraction of a corporation, as well as a claim on a percentage of its assets and earnings (dividends). When trading CFDs, you do not take ownership of the stock and therefore have no rights other than receiving/paying any speculative gains/losses made from the difference in price on initiation of the CFD and the exiting of the contract.

Shares are priced as 00.00 and move in increments of cents, so a stock that is priced at 100.50 that goes on to move to 100.55, is said to have moved 5 cents.

COMMODITIESCommodities are goods of standardized quality and quantity that are traded over an exchange. Commodities fall into two broad categories: hard commodities such as crude oil, gold, silver and platinum that are extracted from the earth, and soft commodities such as wheat, corn, coffee and sugar that are cultivated and harvested.

Commodities are priced in US dollars and structured as 00.00 with increments known as cents, so a commodity that is priced at 31.55 that goes on to move to 31.40, is said to have moved 15 cents.

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INDICESIndices are imaginary portfolios of securities which represent the relative health of a given market or sector of the economy. For example, the S&P 500 tracks the value of 500 of the largest American companies, and represents around 75% of the American equity market. Its value represents the aggregated performance of all the stocks that comprise it. Though each index has its own calculation methodology, what investors look for is the percentage that an index rises or falls above or below its base value. Indices are not technically investment vehicles. However CFDs allow investors to take positions on the changing fortunes of the economic sectors represented by indices.Shares are priced as 00.00 and move in increments of cents, so a stock that is priced at 100.50 that goes on to move to 100.55, is said to have moved 5 cents.

Indices are priced in the currency of the host country in which they are a representive of and are structured as 00.00 and have minimum increments known as cents, so an index that is priced at $ 4329.60 that goes on to move to $ 4320.00, is said to have moved 9 dollars and 60 cents. A UK index will move in pound and pence.

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CFDSTHINGS

TO KNOWIn the past, these types of assets were only accessible and tradable by banks,

corporations and wealthy individuals. This is because the standard trade size of the contracts are large and require a large amount of invested capital as margin to take

advantage of any movement in the price of the assets. In fact, It wasn’t until recently, with the creation of CFD`s and the use of leverage, that everyday investors could take part in the largest markets in the world and together with sound risk management be

successful with a relatively small initial investment. Let us take a look at what the spread, trade size, leverage and margin are and

how they can impact your trading.

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SPREADMarket prices are quoted in pairs known as bid/ask. Bid and ask prices are determined by the most a buyer is willing to pay for a unit of a given instrument, and the least that a seller is willing to accept in order to sell it. The spread is the difference between these two figures.

The bid is the price at which an underlying instrument can be sold at and the ask price, also known as the offer, is the price at which an underlying instrument is available for purchase.

So when trading on a currency pair, for instance EUR/USD, when listed as 1.32166 / 1.32184, the bid price for this currency pair is the first figure of 1.32166, meaning that selling 1 Euro will earn the seller $1.32166. While, the ask price for this currency pair is 1.32184, meaning that 1 Euro costs $1.32184. The difference is the spread, which in this case is 1.8 pips.

The same can be said for commodities, stocks and indices. An ounce of gold will be priced at 1105.50/1106.00, implying that gold can be bought at 1106 and sold at 1105.50 at that point in time. The difference is the spread, which in this case is 50 cents.

TRADE SIZEThe trade size of an asset refers to how much of an asset you buy or sell, the bigger the size you trade the larger your exposure to a specific asset and the larger your potential gains or losses. There are minimum size thresholds in place, which vary depending on the instrument being traded. For example, a minimum size of $2500 can be taken on FX trades, now this might sound like a lot but don’t forget about leverage. Let us take a look at leverage.

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LEVERAGELeverage enables you to command positions that exceed the value of your initial investment. Any time you borrow money or use a financial instrument such as a CFD to make an investment that exceeds the value of your capital, you are using leverage. Leverage is expressed as a ratio. Opteck offers its clients leverage from 25:1 (25 times the amount invested) to 200:1 (200 times the amount invested) depending on the asset being traded. The leverage for each asset class is as follows;

Forex and commodities have a leverage of 200:1 (ie. You need 0.5% of the notional value in margin)

Indices have a leverage of 100:1 (You need 1%

of the notional value in margin)

Stocks have a leverage of 25:1 (You need 4% of the notional value in margin)

Let us assume that we want to enter CFD position as follows; $2500 in EURUSD,2 ounces of GOLD at $1050.00, 3 contracts of DJIA at $16000 and 10 stocks of APPL at $100, what is the required investment you would need in your account?

All in all you would need $543 in your account to open up an exposure equal to $ 53,600.00. The only requirement for this benefit is that you maintain the required investment as a margin in your account so that these position can be maintained. Before leverage was available you would have needed the whole $ 53,600.00 in margin to place these trades. Let us take a closer look at margin and its components.

$ 2500200

(2* 1050.00)200

(3 * 16000) 100

(10*100) 25

$12.50For the

EUR/USDposition

$10.50For the

GOLDposition

$480.50For the

DJIAposition

$40.00For the

APPLposition

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MARGINMargin can be thought of as a deposit that is required when using leverage. Each time you open a leveraged position a certain amount of your account balance is secured as margin. The exact amount is dependent on the size of the position and the leverage which is being used. Margin is there to guarantee the position you have opened in case it goes against you. Just as each pip up or down in an open trade will be reflected in your account balance, it can also eat into your margin should it turn against you.

Initial margin requires that the whole margin is available in your account before a position is opened then reverts to requiring a maintenance margin (minimum margin you should have in the account so that you do not receive a margin call/stop out.) of 50% of this value to hold the positions and for further calculations. In our previous example the initial margin required is $543 and the maintenance margin is $271.50.

Your available margin is the amount you have in your trading account which is not currently being used to guarantee any positions; this amount can be used to guarantee the opening of further trades. If your available margin is less than the initial margin required to open additional trades, the trades will not be opened. Available margin is calculated as equity less the maintenance margin of your open positions. If we have an equity of $1000 in our account, we would have $ 728.50 (1000-271.50) in available margin and can only open positons whose initial margin requirements are equal to or less than $728.50.

Your equity is your trading account balance plus or minus the profits or losses from any open positions you have.

Your margin usage is the percentage of your equity currently being used as maintenance margin and is calculated as maintenance margin divided by equity multiplied by 100. In our example this would mean our margin usage at the time of opening is at 27.15% ($271.50/ $1000.00*100). When this figure increases to 100% it means that all of your equity is being used to cover the maintenance margin and the system will begin closing out positions to reduce this figure.

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77%

Should your equity drop to a level that increases your margin usage to 77%, you will receive a margin alert, alerting you to the fact, and depending on market volatility, giving you the opportunity to add additional funds to maintain any open positions. Should no action be taken by you and your equity falls below the maintenance margin, leaving your margin usage above 100%, you will receive a margin call/stop out , in which the system will begin liquidating your positions one by one, starting from the most unprofitable until the margin level falls below 100% or all positions are closed.

This is why you need to be well capitalized and maintain a margin usage level as far below 100% as possible. This will allow you to stay in a trade for longer should it move in the opposite direction, so if you are convinced of the underlying trend you can wait for it to re-establish itself without risking a margin call.

Let us summaries our example:

We have:

$ 2500200

(2* 1050.00)200

(3 * 16000) 100

(10*100) 25

$12.50For the

EUR/USDposition

$10.50For the

GOLDposition

$480.50For the

DJIAposition

$40.00For the

APPLposition

A Margin alert will be issued when your margin usage reaches 77%.

When your equity falls below your maintenance margin of $271.50, resulting in your margin usage increasing above 100%, the account will receive a stop out or forced liquidation starting with the most unprofitable trade first, at which point the system will recalculate the margin usage for the remaining positions, liquidating the next most unprofitable trade until the margin usage is restored below 100% or all positions are closed.

This means that we have a total exposure of $ 53,600.00 and require $ $543.00 as initial margin and a maintenance margin of $ 271.50. Therefore;

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It is your responsibility to ensure that your account is sufficiently funded at all times, If the ‘Available Margin’ on your account falls below the required collateral limit(s), you will only be allowed to close open positions, until the ‘Available Margin’ on your account is back in excess of the required margin percentage for all open positions.

If any of your positions are denominated in a currency other than the base currency of your account, they will be continually valued at the applicable exchange rate. Your Account Statement report will then value all your positions in your nominated currency.

ROLLOVER INTERESTWhen a position is held at the end of a business day, it rolls over to the next value date and becomes subjected to a swap charge or credit, based on the interest rate of the relevant currency being held. For Forex, traders are charged interest on the currency they have borrowed and are paid interest on the currency they have bought. So, depending on whether the quote currency’s interest rate is higher than that of the base currency, a trader may owe interest, or be owed interest when a roll over occurs.

For Commodities, US Indices and US Stocks will be exposed to US interest rates while European Indices and Stocks will be subject to EU interest rates. Rollovers are calculated in points, and are automatically converted into the account base currency at 00:00 GMT.

CURRENCY CONVERSIONYour account balance is always denominated in one currency, which can be in either USD, EUR or GBP. However, assets can be priced in another currency and depending on the asset, your account information will need to be adjusted so that all positions are priced in your accounts currency automatically by the system which uses the market prices at the specific time of conversion.

For open positions, the system converts the Initial Margin and Maintenance Margin to your base currency at the time of opening and only once the positon is closed does the system convert the net P&L to your own currency- till then the position P&L is valued according to the asset currency.

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CFDSORDER TYPES

There are two types of orders that are required to successfully open and close a CFD, one is the entry order and the other is a closing order. These orders can

take the form of a market order, in which you simply click to buy or sell an asset and then select to close that asset by clicking to do so at the current market prices. Or, an order can be in the form of a pending order, which are specific instruction to buy or sell an instrument when certain preconditions specified

by the trader are met.

Pending orders fall into two categories, limit orders and stop orders. Essentially, when placing a pending order a trader is informing their broker that they do not

want the current market price, but rather that they only want their order executed if the market price reaches a certain level.

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Limit ordersLimit the price at which a trader is prepared to buy or sell. There are two types of limit order; a buy limit order instructs that an instrument is bought at a specified price or lower, a sell limit order instructs that an instrument is sold at a specified limit price or higher. A take profit order is a popular limit order which, should price action reach a certain value predefined by the trader, liquidates a position and realizes the resulting profits from it.

Stop ordersAre pending orders which also instruct that positions are opened or closed when specified prices are reached. Buy stop orders are entered above the current market price and sell stop orders are entered below the current market price. Stop orders are used to lock in profits, restrict losses, or to go long when an asset’s price is rising and short when it is falling. A Stop-loss order is used to minimize losses incurred by a trader in the event that a trade moves in an unprofitable direction. This is done by automatically closing an open trade when the price reaches a level predefined by the trader.

You should note that your Orders may be executed regardless of the length of time for which your Order is reached or exceeded. In volatile markets our quote might ‘gap’ through your Order level, so that the closing level (which still limits your loss) or the opening level may be beyond the exact level specified by you.

It is important to understand that when you place an Order, you are dealing with Opteck as the principal; you are not dealing on the underlying market. While we seek to execute your order at the requested price, it may at times not be possible and the next best price will be executed instead. This might either be in your favor or against depending on market volatility. Margin requirements are not affected by adding an Order to a position.

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CFDSACCOUNT

INFORMATION

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%

Margin usage

(Maintenance margin/Equity)

* 100

BalanceThe amount of money held in your account

excluding P&L of open positions.

Equity Your account balance,

including P&L of all open positions.

Available Margin Funds available for

trading (unattached to any position yet).

Balance + P&L

Account Currency:

Maintenance Margin

Amount currently used to maintain your open

positions. In order to keep your open position/s

active, ensure that your equity exceeds the

maintenance margin level. Otherwise the position will automatically close.

Open P&L Your total Profits

and losses in all open positions.

Margin UsageThe percentage (of the 100% equity) you are

currently using in your open positions.

Σ(P&L + Daily premium *

number of days)

During the day, on a real time basis, your account balance(s), including all open positions, are valued against the underlying assets current quote. Therefore your ‘Equity’, ‘Available Margin and ‘P&L’ are constantly calculated in line with market movements.

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CFDSEXAMPLES

OF OPENING AND CLOSING

TRADES

Buy

Sell

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Let us now look at an example that will place the above information in a practical context. You open an account with Opteck and deposit USD 1,000, your balance is now $ 1,000. You analyze the markets and decide to invest in 3 assets;

Buy 30,000 GBP\USD at market price of

1.5600/1.5602

Buy 30,000 at ask price:30,000 x 1.5602

$46,806 USD

Buy limit of 100 contracts of Ford

stock at 12.00

The contract is leveraged on a 1:200 ratio.

We convert the contract size to the account

currency and the apply the leverage

Sell stop of 5 ounces of GOLD at 1050.00

The broker earns the Spread. In this example, the difference is 0.0002 (known as two “pips”), which amounts to $6

USD. It is built in to the price when you clicked “buy” and again when

you click “sell”.

POSITION 1Position 1 is opened immediately because it is a market order, we are buying therefore the positon is opened at the ask price of 1.5602. Our exposure is 46,806 USD (30 000 *1.5602), this implies that we have a margin requirement of 234.03 USD (46,806/200). Don’t forget that all margin and profit and losses are converted to your deposit currency.

46,806 200

234.03 USD (Initial Margin)

(1.5602-1.5600) x 30,000

$6 USD

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You place a 25 pip stop loss and a 50 pip take profit on your position and step away from your computer. The position remains open overnight until the take profit is hit the next day.

When a position is held open overnight, you are paid or debited

a premium based on interest rate differentials.

In this example:GBP/USD has a daily

swap BUY of 0.00019 Points

The next day the price of GBP/USD has increased

by 50 pips to1.5650 (bid)/ 1.5652 (ask). The trade has moved in your favor and your take profit has been triggered

And the position Is automatically closed at the bid price

30,000 x 0.00019 1.5650 x 30,000

-$5.7 USD $46,950 USD

Your gross profit is the difference between the

opening position and the closing position

Your net profit is the gross loss + the

rollover costs.

46,950-46,806 144 - 19

$144 $138.3 USD

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Buy

Sell

POSITION 2The price of Ford at the time of placing the limit order was 13.00/13.05, only once the ask price (remember we are buying) reaches 12.00 would our order be triggered, until then no action will be taken regarding the position until it is triggered or canceled by the trader. Assume the market price drops and the Price of Ford is now at 11.95/12.00. The Limit order will be triggered at 12.00.

Buy 100 at ask price:100 x 12.00

$1,200 USD

The contract is leveraged on a 1:25 ratio.

We convert the contract size to the account

currency and then apply the leverage. In this case

it was the same

The broker earns the Spread. In this example,

the difference is 0.05 (known as 5 “cents”), which amounts to $5

USD. It is built in to the price when you clicked “buy” and again when

you click “sell”. 1,200 25

48 USD (Initial Margin)

*remember the price of a stock is dependent on which country

it is from. (12.05-12.00)x 100

$5 USD

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You place a 100 cent stop loss and a 200 cent take profit on your position and step away from your computer. There is no cost or fee charged for placing a Stop Order. Should the market move against you, your position would be closed at 11.00, however, should the market gap straight through your Stop Order, your position would be closed at the next available level that is considered representative and fair.

The position remains open through the US session but moves against our favor, luckily we have a stop loss in place and our losses are restricted as follows.

Ford has decreased by 200 cents, but we have a stop loss at 100 cents

which is triggered

And the position Is automatically closed

at the bid price

Your gross loss is the difference between the

opening position and the closing position

100 x 11.00 1,200-1,100

1,100 USD $100

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POSITION 3The price of Gold at the time of placing the limit order was 1160.00/1160.50, only once the bid price (remember we are selling) reaches $1150.00 would our order be triggered, until then no action will be taken regarding the position until it is triggered or canceled by the trader. Assume the market price drops and the price of Gold is now at $1050.00/1050.50. The stop order will be triggered at $1050.00.

Sell 5 ounces at bid price:5 x 1050.00

$5,250

The contract is leveraged on a 1:200 ratio.

We convert the contract size to the account

currency and then apply the leverage. In this case

it was the same

The broker earns the Spread. In this example,

the difference is 0.50 (known as 50 “cents”),

which amounts to $2.50 USD. It is built in to the price when you clicked “buy” and again when

you click “sell”.5,250 200

26.25 USD (Initial Margin)

*remember commodities are

priced in USD.

(1050.50-1050.00) x 5

$2.5 USD

Gold continues to drop another $10 at which point you decide to manually close the position to book your profits.

Gold has decreased by $10 to 1039.50/1040.00.Your gross profit is the difference between the opening position and the closing position

10 x 5

50 USD

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CFDSEXAMPLES OF AN ACCOUNT

BALANCE

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You signed up and deposited $1000 via credit card

Balance: $1000. (Deposits - Withdrawals + P&L of closed positions)

P&L = $0. (Total profit and loss of all open positions including rollover premiums)

Equity: $1000 (Balance + P&L of open positions)

Maintenance Margin: $0.

Available Margin: $1000 (Balance + P&L of open positions - Maintenance Margin)

You buy 50 Gold ounces at a market price of $1200.00

The total amount bought is: 50*$1200.00 = $60000The Initial Margin that is needed for Gold is 0.5%: $300

The Maintenance Margin that is needed to maintain a Gold position is 0.25%: $150

If your equity falls below $150 you will get a margin call and the position will be closed automatically.

Balance: $1000P&L = 0 (usually the Spread of Gold is 50 cents so you would have a P&L of -$25)

The Available Margin after You bought the Gold is: $850. ($1000 - 0.25%*$60000 = $150).Equity is $1000 ($1000 + $0).

10:00 AM

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Gold jumps to $1205.

'Balance': $1000

'P&'L: +$250. (50*$1205-50*$1200)

Available Margin: $950. ($1000 – 0.25%*$60000 +$250= $1100).

Equity: $1250 ($1000 + $250).

Gold jumps to $1208.

'Balance': $1000

'P&'L: +$400. (50*$1208-50*$1200)

Available Margin: $1100. ($1000 – 0.25%*$60000 +$400= $1250).

Equity: $1400 ($1000 + $400).

You close the Position.

Your P&L is $400 on the trade.

Balance: $1400.

P&L:$0

Equity: $1400

Available Margin: $1400

Maintenance Margin: $0

12:00 PM

12:15 PM

12:15 PM

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GLOSSARY

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PIP (Point in Percentage): The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal.

Bid Price: Price for which the market maker will buy the base currency.

Ask Price: Price for which the market maker will sell the base currency.

Spread: The difference between the Bid price at which you can sell the trading instrument and the Ask price at which you can buy the trading instrument.

Stop Loss order: This is a stop order that will execute and close a position to limit losses in case of an adverse market movement. When a stop order is executed, it becomes a market order and is filled as soon as possible at the price obtainable on the market. Note that this price may differ from the price you set for the order (Slippage).

Limit Order: Limit orders are commonly used to enter a market and to take profit at predefined levels. Limit orders to buy are placed below the current market price and are executed when the ask price hits or breaches the price level specified. Limit orders to sell are placed above the current market price, and are executed when the bid price breaches the price level specified.

GTC: A type of limit order that is active until it is filled or canceled. As opposed to a day order, a GTC order can remain active for an indefinite number of trading sessions.

If Done Order: An If Done order actually consists of two orders: a primary order that will be executed as soon as market conditions allow it, and a secondary order that will be activated only if the first order is executed.

Leverage: The ability to hold an investment position of greater value than your equity. When leveraging your investment, simply deposit a part of the current value of the instrument you are investing in.

Rollover: When a position is held at the end of a business day, it rolls over to the next value date and becomes subjected to a swap charge or credit, based on the interest rate ratio between the two trading currencies. Rollover/swap rates are calculated in points, and are automatically converted into the account base currency.

Position: An investment in an instrument. For example, when you trade (say, buy) USDJPY, you open a USDJPY position. When you then execute the opposite trade (in this case, sell) USDJPY, you close the position.

Market Maker: A recognized institution or individual willing to trade certain securities any time that a trader wants to buy or sell.

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Balance: The amount of money held in your account excluding P&L of open positions.

Equity: Your account balance, including P&L of all open positions.

Maintenance Margin: Amount currently used to maintain your open positions. In order to keep your open position/s active, ensure that your equity exceeds the maintenance margin level. Otherwise the position will automatically close.

Available Margin: Funds available for trading (unattached to any position yet).

Open P&L: Your total Profits and losses in all open positions.

Margin Usage: The percentage (of the 100% equity) you are currently using in your open positions. Margin usage = (Maintenance margin/Equity) * 100

Net Exposure: The sum of all your open positions currently traded on the markets.

Exposure Coverage: The Net Exposure (%) covered by your equity.

Margin call: When your equity falls below the required ‘Maintenance Margin’, you are subject to a margin call to remedy the situation. To avoid having your positions closed for you (being stopped out), you must either close or reduce open positions, or send additional funds to cover your positions.