CFD Glossary

CFD Glossary
 
CFD – Contract For Difference
CFD a derivative trading instrument that allows you to trade the price movements when you enter (buy) and exit (sell) a trade, without owning the underlying instrument, in most cases shares or equities.
 
Compared to share trading, CFD trading has one key difference – when you trade a CFD you don’t own the actual share. If you trade a CFD on Pepsi or BHP Billiton, you are trading on the price difference between your entry point (buy) and your exit point (sell). You don’t own the Pepsi or BHP Billiton shares; you are only counting on their price going up or, under another strategy, going down.
 
Guaranteed Stop-Loss Order (GSLO)
This variation on the Stop-Loss order (see Stop Loss Order) guarantees that your CFDs are taken out (bought) at a pre-set price even if the share CFD price gaps widely against you. A few CFD providers now offer GSLO, but you have to pay a small price to use it because the guarantee is a premium service. Unlike the regular stop-loss order that can be placed electronically on the trading platform, GSLO can only be placed by calling your CFD provider on the telephone during market hours.
 
If Done Order
Similar to an OCO (see One Cancels the Other), an ‘If Done’ order links two orders together. The difference in this type of order is that once the first order is executed the second one is automatically entered into. A usual application of this order is to set a Limit Order and ‘If Done’ a stop-loss level.
 
Index
An index is a collection of stocks and the corresponding composite value of its components. In Australia, the All Ordinaries (All Ords) is the index which consists of all the publicly listed companies in the Australian Stock Exchange. The closing value of the All Ords changes everyday depending on the price movements of all the shares.
 
Limit Order
A Limit Order is an order to buy or sell a share at a specific price. The order will only be carried out by the broker at that price, or a better one. If the broker can't fulfill the Limit Order, it lapses.
 
One Cancels (the) Other (OCO)
This is an advanced type of order which links two orders. In this instance the execution of the first order will mean the automatic cancellation of the other order linked to it. A usual application of an OCO is to link a Limit Order (see Link Order) with a stop order.
 
Portfolio diversification

If you’re a long-term buy and hold investor you can use CFDs to take advantage of short-term profitable moves in the market without affecting your long-term investment. This means while your long-term positions are growing over time, you can trade CFDs to deliver profit from short-term to medium-term trades.

Portfolio hedge

Hedging means protecting or trying to minimise any risk that may affect your existing investment portfolio. Many people are now using CFDs as a hedge to protect their share/equity investment.

Sector CFDs
The Australian stock market consists of 12 industry groups called sectors. This grouping is based on an international standard to make it easier to classify companies into their respective industries. Check with your CFD provider if they offer Sector CFDs to make sure that you can trade them if you don’t want to do stock specific trading.
 
Stop-Loss Order (SLO)
One of the most effective ways to manage your CFD trade is to use a stop-loss order, which will take you out of a trade once the price of a CFD moves against you. A stop-loss point or level is a pre-determined price at which you want to get out of a trade if it goes against you. Ideally, you should place your stop-loss order using the electronic trading software as soon as you open a CFD position.
 
One thing to note and remember with stop-loss orders though is that even if you have nominated a stop-loss or exit level, there is a possibility that your position would not be closed out at exactly the nominated price if there is insufficient available buyer volume to take out your order size or the share CFD price gaps vary widely. Most CFD providers offer stop-loss orders as a regular feature of their trading platform at no extra cost. Make sure that your CFD provider allows for stop-loss orders and allows you to change them frequently and that they can be done online or over the phone for free.
 
Tradable on margin
You only need a small percentage of your trading capital to open up larger or more positions than you could open if trading shares directly. CFDs providers require from 1-10% margin depending on the share CFD. Being able to trade on margin is the biggest attraction of CFDs because it increases the opportunity to make profit using a small capital. But it is a two-edged sword – it magnifies both potential profits and potential losses.

 

 

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