How are Contracts for Difference priced?
CFDs are priced based on the underlying asset they mirror, in the case of DMA (Direct Market Access) providers. Market Makers typically add a spread to the underlying market price. These spreads can be fixed or variable, and depend on factors such as the liquidity and volatility of the underlying asset.
It’s extremely important to check exactly what the underlying asset for the Contract for Difference (CFD) you are trading is. For example, if you are trading on index CFDs, the price could be based either on the index itself or on the futures market of that index. This will be disclosed by the broker but don’t get confused. In fact, many brokers offer a market on both. As such, you need to be well aware of which of these your position is based on.
You make a profit on a CFD (Contract for Difference) when you close it out at a higher price than you opened it for (assuming you are holding a long position); or if you close it out at a lower price than you opened it for if you are holding a short position (for more on shorting CFDs, click through to this article). The amount you make is based on the difference between your opening and closing position, times any leverage you are using.
Because CFDs are typically highly leveraged products, there is great potential to make significant profit (or, conversely, loss) in a short amount of time. As such, it’s worth learning how CFDs work using a demo account or perhaps your own money with low leverage to get a feel for how the markets work. It is definitely very possible to make money through trading CFDs though, as mentioned above, there is significant risk involved in trading of this form.