CFD Trading

CFD trading is quite similar to forex trading. When trading on the platform, you select the instrument you wish to trade and enter your order. If you think the price of a certain instrument, e.g. crude oil, will increase, you’ll want to BUY the crude oil CFD. The same goes the other way – if you predict the value will go down, you short sell the CFD. Naturally, as with any type of trade or investment, wrong predictions can lead to the loss of money, and one should be aware of the risk involved in CFD trading before starting out. There is plenty more to learn about CFD trading, and you can browse through our education section, watch video tutorials, read articles, get news updates, and more.

AvaTrade does not charge any exchange fees and offers tight spreads on open positions. The spread is the difference between the BUY and SELL prices of a certain instrument. When calculating the cost for a position, you need to multiply the spread by the size of the position. For example, if the spread for crude oil is $0.03 USD, the cost for opening a 10 barrel-position is $0.03 X 10 barrels = $0.3 USD. Most of the CFD instruments are traded on market spreads, which means that the spreads are affected by the liquidity of the market. The more liquidity, the narrower the spread will get. You can review the levels of leverage and spreads for all CFD instruments on our trading conditions & charges page.

CFDs do not have an actual expiry date and can remain open as long as possible. However, keeping the position open after the market close can incur fees known as a rollover in CFDs or swaps in Forex currency pairs. Therefore, it would be in your best interest to calculate possible swaps in advance and project it onto your expected return.

CFDs are not traded in a regular stock exchange, and therefore don’t have expiration dates that would require buying or selling the underlying asset at a certain price.

CFDs are considered tax-efficient for many investors in different jurisdictions. They do not attract Stamp Duty because they are technically not assets. But CFD profits can be subject to Capital Gains tax in certain jurisdictions. While limited tax liability is rarely a major incentive to trade CFDs, it is important to consider the relevant laws that apply in your specific jurisdiction before you trade.

Hedging is a risk management strategy that involves opening opposite or offsetting trades designed to practically mute the risk exposure of open trade in the market. CFDs represent an ideal type of derivative to implement a hedging strategy effectively. To start with, they are low-cost and liquid. But they can also be customised (in terms of size and amount) to meet the specific hedging objectives any investor desires.

As an example, if you hold $10,000 worth of shares of Tesla in your portfolio, you could hedge the position by selling an equivalent or part amount of Tesla stock CFDs. In that way, if Tesla prices fall, the loss in value in your physical shares portfolio will be offset or cancelled by the profits gained by the CFD trade. You can then close out the CFD trade when the downward retracement comes to an end so as to lock in your profits and to give the value of your physical Tesla shares the chance to rise again.

CFD hedges are ideal when a market is moving against you (either due to sentiment or overall fundamental reasons) or when the market has moved so much in your favour that any extra gains are likely to be fractional. On the other hand, CFD hedges can be particularly riskier because of leverage; they are therefore not ideal when the underlying market is very volatile or when a retracement has been overextended.

Each index and commodity CFD is based on a contract defining its rates, charges, etc. Each of these specific CFD contracts has an expiry date, which is the date that the contract expires and is automatically replaced by a new contract, just like the real market. In order not to disturb traders during market hours, the contract rollover takes place over the weekend.