Raw materials in this article
indices in this article
by Gian Hessami, Euro am Sonntag
The price turbulence in the wake of the Corona crash has called many traders on the scene. The best example of this is the increased activity in contracts for difference. With these Contracts for Difference, or CFDs for short, investors can benefit disproportionately from price movements in an underlying asset. Depending on market expectations, traders speculate on rising prices with long CFDs and on falling prices with short CFDs.
“Being able to react quickly and flexibly to strong price fluctuations without transaction costs eating up the return – this is precisely what makes CFDs attractive for both short-term day traders and investors with buy-hold strategies,” explains Markus Kegler, Managing Director of CMC Markets Germany. The broker senses the growing interest from increasing volatility in both trading volume and customer numbers.
CMC Markets Germany recorded four times as many account openings in the turbulent stock market months of March and April as the average of the three months before, reports Kegler. Due to the greater trading activity of customers in the final quarter of January to March, CMC Markets was able to almost double its net sales worldwide for the entire financial year compared to 2018/19 to 252 million British pounds. This resulted in a pre-tax profit jump to £ 98.7 million from £ 6.3 million a year earlier.
German and US indices popular
German and US stock indices are particularly popular with local traders. The three most traded underlyings on the German CFD market at CMC Markets this year are first the DAX, then the Dow Jones and in third place the Nasdaq 100. “The three stock market barometers have been at the top of the list for CFD traders for years. This is due to their high level of awareness and the high liquidity of the indices, “says Kegler.
At Broker IG, the three indices are also at the top of the trading ranking in the same order. “The DAX is an internationally popular index in derivatives trading. And the home market is particularly interesting for German investors,” says Simona Stoytchkova, Managing Director at IG Europe. The high volatility in the Corona crisis has opened up many trading opportunities. Since the outbreak of the pandemic, traders at IG have also been paying more attention to price movements in the raw materials gold and oil set. The yellow metal was in high demand as a safe haven, which recently led to a new all-time high.
In the case of oil, the bizarre circumstance that the price was briefly negative in the spring sparked lively trade interest. The price for the May futures contract for the US oil type WTI collapsed in mid-April to minus 40.32 dollars a barrel (a barrel with 159 liters). “This has never happened since the futures markets were introduced in 1985,” explains Salah-Eddine Bouhmidi, market expert at IG. In the middle of the week WTI was trading at plus $ 42.50. Those who bet on the price recovery for crude oil with contracts for difference could participate with a leverage of a maximum of 10. The leverage arises with CFDs because investors only deposit a small part of the base value as security (margin). The smaller the margin, the greater the leverage. For example, with a leverage of 10, the margin is ten percent of the traded value. Example: A CFD trader uses this leverage to bet on rising prices. The base value increases by ten percent. The value of the CFD contract increases by 100 percent at the same time. However, the lever also works in the other direction. If the trader is wrong with his market expectation, he suffers high losses.
Just a few years ago, some brokers were offering private investors exorbitant leverage of up to 400. This was limited by the European supervisory authority ESMA because of the high risk. Depending on the underlying asset, leverage from five to 30 is now possible. “In the CFD area, leverage of a maximum of 30 is currently possible for the main currency pairs, a maximum of 20 for the main indices and gold and a maximum of 10 for commodities except gold,” explains IG expert Stoytchkova.
Speculate on a stronger euro
The euro / US dollar currency pair is also high on the popularity scale at CMC Markets and IG. No wonder, because the euro has gained around ten percent in value against the greenback in the past three months. Anyone who bet on rising rates of the European common currency with CFDs could participate with leverage 30.
“We are currently seeing a real tide change. After years of dollar strength, the wind has turned,” says Jochen Stanzl, chief market analyst at CMC Markets Germany. Now zero interest rates are also a reality in the USA. “After deducting inflation, real interest rates are even negative. The markets react to this by devaluing the dollar against the euro.”
By the way: Not only the leverage was regulated for CFDs, also the obligation to make additional payments – it has been abolished across the EU. If the trading account used to slide into the red, investors had to pour more money. In the worst case, that could mean their ruin.
Understand markets and products
“Investors should be able to realistically assess the markets and their own trading and market knowledge,” says Simona Stoytchkova. Especially in the current time, the volatility on the financial markets is well above the normal level.
Carlo Alberto De Casa, chief analyst of the broker ActivTrades, adds: “It therefore makes sense to deal well with the differences between the products that you want to trade in order to understand the respective mechanisms and benefit from them.” While indices are very easy to understand, the derivation of nominal values is more complex for currencies.
Stoytchkova advises investors to use “reasonable risk-money management” and not to risk too much at once. “We encourage our customers to continue their education and to constantly expand their trading and market knowledge and to only execute those trades with their own money that they have already tried out and understood in the demo account.”
Underlying: Anyone who invests in CFDs should carefully study the corresponding underlying asset to which the contract for difference relates and have a market opinion on it. A share, an index, a commodity or a currency pair, for example, can serve as the base value. The more fluctuations, the better the chance of returns – and the higher the risk.
Broker: Before investors can trade CFDs, they must open a CFD portfolio with a broker of their choice. In legal terms, contracts for difference are an agreement between an investor and a broker. The CFD provider (broker) sets the courses, sets the conditions and offers appropriate trading opportunities. It is therefore worth taking a closer look at the broker’s terms and conditions.
Lever: The leverage enables investors to move more capital in the market than they actually have available in their account or in their custody account. When investors trade CFDs, they not only use their own capital, but their broker basically grants them a loan. With this type of loan, traders are able to trade a larger amount, such as stocks, than would be possible without this loan.
Stop-loss order: To minimize trading risks, investors can add a stop-loss order to orders, which is usually free of charge when trading CFDs. This can be done using the software provided by the broker. Traders set a lower price limit for long CFDs and an upper price limit for short CFDs. If the underlying reaches this level, the position is sold at the next tradable price.
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