CFD key terminology

CFD Terms to Know

CFD trading can appear complicated, especially if you’re just starting out. That’s why we’ve compiled the topmost common and most important terms to help familiarise yourself with the world of trading.

A-D

1. Ask 

The lowest price at which a seller is willing to sell an investment or asset at a given moment. Also known as the offer price. 

2.Bid 

The highest price that a buyer is willing to pay for an asset at a given moment.

3.Bid-offer spread 

The difference between the buying price (offer/ask) and selling price (bid) of a product. 

4.Bull and Bear market 

A Bull market is distinguished by rising prices. Bullish investors have a positive opinion about a market, believing that prices will continue to rise. A bear market, on the other hand, is distinguished by falling prices and negative sentiment. 

5.Buy position 

A position in the market that would profit from a rising market price, or make a loss should prices fall. 

6. Candlestick chart 

As with a bar chart, this graph shows the high, low, opening, and closing prices, and the shape of the candle reflects the relationship between these prices. It shows a visual representation of the prevailing trend and current market sentiment. 

7. Carry cost 

The cost incurred as a result of holding a position (e.g., insurance costs, storage costs, interest charges). 

8. Cash price

The price of an asset for immediate delivery. Often used for stock indices; synonymous with the spot rate for forex and commodity prices. 

9. CFD (Contract for Difference)

A financial derivative that allows traders to speculate on price movements of assets without owning them.

10. Close out 

Selling a buy position or buying back a sell position, which closes the position, so that you no longer have any exposure to changes in the market price. 

11. Contango

 A situation where the futures price of a product is above the expected future spot price. 

12. Contract (unit or lot) 

The standard trading unit on certain exchanges. For stock index, forex, and commodity positions, it is the amount of base currency profit or loss per point movement in the market. 

13. Dealing spread 

The difference between the buying and selling price of a contract. 

14. Diversification 

An investment strategy that aims to manage risk through variety within an investor's trading portfolio. 

15. Dividends 

A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. 

E-K

16. Equity 

The current worth of a trader's account, factoring in both the gains and losses from open and closed positions. 

17. Exposure 

The level of an investment which is at risk. The higher the exposure, the bigger the potential loss or gain. 

18. Fair value 

The premium (or discount) of a futures contract against its underlying spot/cash instrument, consisting of an interest and dividend component. 

19. Floating profit/loss 

Current profit/loss on open positions calculated at current prices. 

20. Free margin 

Funds on the trading account which may be used to open a position. It’s calculated as account value less necessary margin. 

21. Fundamental analysis 

Evaluating the factors that influence an asset's value, such as economic indicators, interest rates, and company earnings, to make informed trading decisions. 

22. Futures 

A future rate is an agreement to conduct a transaction at some specified time in the future, with the price agreed now. 

23. Gearing 

A measure of leverage used, usually expressed as a percentage. Small price movements create amplified gains or losses, and therefore losses can exceed deposits made. 

24. Guaranteed stop-loss order (GSLO) 

A stop-loss order that guarantees the price your trade will be closed out at, unaffected by slippage or gapping. 

25. Hedge 

A way of reducing the risk of losses that may occur if interest rates, share prices, or foreign exchange rates move in the wrong direction. 

26. Holding costs 

Positions that are held open past 17:00 New York time will incur holding costs, based on the notional potential size of the position. 

27. Leverage 

Allows traders to gain a large exposure with a relatively small outlay, amplifying both potential profit and loss. 

28. Liquidity 

Describes how easily an asset can be traded in the market without causing a significant shift in its price. High liquidity means more active trading and narrower bid-offer spreads. 

M-Z

29. Margin 

CFD trading requires investors to deposit a small percentage of the overall cost that would be required if they were to purchase outright the equivalent product in the physical market. 

30. Margin call 

A broker's request to an investor using margin to deposit additional funds. 

31. Mark-to-market 

The daily adjustment of an account to reflect accrued profits and losses, often required to calculate variations in margins. 

32. Order types 

The different methods traders use to buy or sell in the market, such as market orders, limit orders, stop-loss orders, and take-profit orders. 

33. Pip 

The smallest possible change in the value of a currency pair, often reflected in the fourth decimal place for most currencies. 

34. Position size 

The volume of currency or contracts involved in a specific trade, crucial for managing risk and potential returns. 

35. Risk management 

The use of various tactics to protect against potential trading losses, including the use of stop-loss orders, careful position sizing, and portfolio diversification. 

36. Scalping 

A rapid-fire trading approach aimed at making quick profits from small price movements in a short time frame. 

37. Slippage 

The difference between the requested level of an order and the actual price at which it was executed. 

38. Spot price 

The price quoted for immediate settlement or delivery of a currency, index, commodity, or share. 

39. Swap 

An overnight interest charge (or credit) applied when holding positions past the market close, sometimes known as a rollover fee. 

40. Technical analysis 

The practice of interpreting past price movements and trading volume data to predict future market behaviour. 

41. Volatility 

An explanation of how quickly the price of a market or instrument rises or falls. A highly volatile market can be risky for short-term investors.