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Want to know the ins and outs of how CFD trading works? Here's a glossary of all the terms you need…

by , 29 June 2015

Contracts for difference (CFDs) provide you with a great way to trade shares and indices.

They appeal to many traders as the pricing is very transparent, they're quite simple to understand, and fees and charges are much less than buying shares outright.

To really get to grips with trading CFDs, there are a few key terms you need to understand.

Read on to find out what these are…


The essential trading lingo you need to know to trade CFDs


Ask price
When you see a CFD quote, there are two prices.

The ask price is the higher of the two. This is the price you’d buy CFDs at when entering a long CFD trade (when you think the underlying share is going to rise in value).

This is also known as the offer price.

Bid price
From the two prices in a CFD quote, the bid price is the lower of the two.

This is the price you’d sell CFDs at when entering a short CFD trade (when you think the underlying share is going to fall in value).

Bid/ask spread
This is the difference between the bid price and the ask price. The more liquid the underlying share or index, the tighter the spread tends to be.

Dividends
When a company pays a dividend this also affects your CFD position.

If you’re in a long trade, you’ll receive the dividend. If you’re in a short trade, you’ll have to pay the dividend.

Funding
This is the daily financing charge on all your open CFD positions. Your broker or trading company will calculate this each day you hold a CFD trade open overnight.

In a long CFD trade, you pay the funding charge. In a short CFD trade, you receive the funding charge.

Gearing/leverage
You achieve gearing with CFD trading by borrowing funds (trading on margin). This is also called leverage.

Initial margin
This is the amount of cash you need to put down to open a CFD trade.

Margin
This is the amount of money you need to have in your trading account to maintain your position.

Mark to market
This happens each day when the company you trade through compares the value of your CFD position to the previous day’s close. This is how they calculate your profits or losses and this reflects in your trading account.

So there you have it. A glossary of all the terms you need to know when trading CFDs.

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Want to know the ins and outs of how CFD trading works? Here's a glossary of all the terms you need…
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