What is a CFD contract?

eToro provides a wide variety of trading instruments, starting from simple assets like stocks and commodities, and onto more elaborate financial derivatives, such as options and CFD’s, which we will discuss today.

(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings.  In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)

CFD

CFD stands for a contract for difference, one of the most traded complex instrument which does involve owning an actual financial product. CFD derives its value from the price movements of the underlying asset, and trading a CFD involves entering into an agreement with a broker to settle the spread (i.e. the difference) between the price of an asset at the opening and at the closure of the contract. Hence you are able to take advantage of this agreement in case the price moves in the direction of your expectation.

So for example, if you are expecting a stock to go up in price between the time you open and close position, opening a long position in CFD would allow to take a profit i.e. the difference, in case the expectation you hoped for proves to be right.

eToro offers several assets that can be traded as CFD’s on the platform, including stocks, commodities, indices, currencies and cryptocurrencies, all of which you can monitor on your ‘Watchlist’.

What are the advantages of a CFD?

One of the main reasons to use a CFD is the leverage it allows for, as you only need a margin to open a position rather than the full value Since you are engaging only a fraction of your capital in an open position, the rest of the capital is borrowed from the broker.

So for example, purchasing 100 shares of a company each one costing 50$ (so worth 5 000$ for the position in total) using CFD’s with x5 leverage would require depositing a margin of only 1 000$ rather than the full amount.

CFD also allows for a short position to be taken on a financial product, which is not permitted for many assets like stocks or commodities, so there is a possibility for you to profit off declining markets. For example, you anticipate a decrease in share price due to unfavorable news or market conditions, and want to take an advantage of that by selling contracts now and take the profit when asset price drops in the future. eToro likewise offers various levels of leverage for short selling transactions on the platform, which you can see after clicking on the chosen asset as shown on the image below.

This is certainly more flexible than many other assets available for trading as you are able to benefit off market movements in all directions as well as access multiple markets worldwide. Furthermore, CFD allows to trade shares in fraction and are overall considered to be very liquid.

What are the dangers?

Certainly, CFD also presents several risks and may not be appropriate for every trader, particularly for less-experienced traders.

The leverage available for this profit exposes you to not only to potentially larger gains but larger losses too. In case the asset price moves in the position opposite to what you hoped for, the losses will be magnified by the leverage proportionally as you will be held liable for the borrowed amount needed for the position.

Because margin trading allows for a smaller capital commitment and leaves more money to be invested into other positions, there is a risk of overtrading and opening multiple positions. This might lead to exposing your portfolio too much to market changes and not leaving sufficient capital to cover for potential losses in case your expectations are incorrect.

Types Of CFDs Available On eToro

eToro offers several assets that can be traded as CFD – currencies, commodities, indices, stocks, and cryptocurrencies.

Forex (Currencies)

The forex market is presently one of the world’s biggest and most fluid. The process of trading forex remains the same with CFD, the advantage here being that trades can be made without actually buying the currency. It only calls for a prediction of how the asset is expected to behave, following which a profit or loss is calculated as the difference between the opening and closing price.

Commodities

A commodity is defined as an item or good, instances of which are considered equivalent – or nearly so – without regard to who produced them. Examples of which are oil, precious metals, commercial staples like sugar, wheat etc.

Indices

An index measures a stock market or a part of it. They help investors compare prevailing price levels with former prices to gauge market performance. Indices are traded as a whole on trading platforms, like eToro.

CFD Stocks

Some of the world’s largest companies can be traded without having to buy them, by means of CFD. The trading price of the stock is indicated by how the firm is doing. Therefore, staying up to date on the company’s performance is crucial when trading with CFD. Analysis and a deep understanding of market patterns are essential.

Cryptocurrencies

Off late, cryptocurrencies are increasing in popularity each day. They are believed to change the course of the global economic system. eToro offers the opportunity to trade assets like Bitcoin, Ethereum, Ripple etc. There are now more ways to obtain cryptocurrencies than mining.

Please do not undermine the importance of a solid theoretical knowledge base, understanding of key strategies and practicing enough before putting your money at risk with complex financial instruments. Hopefully, this article explained the key aspects of CFD’s which you can implement into your trading.

Enjoy trading!

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eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Past performance is not an indication of future results.

eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.