Learn the most important definitions to know when entering the world of CFD trading. From leverage and swaps, to learning how to place take profit and stop loss orders.
- Bid / ask prices - this refers to a two-way price quotation that indicates the best potential price at which a security can be sold and bought at a given point in time. The bid price represents the maximum price that a buyer is willing to pay for a share of stock or other security. The ask price represents the minimum price that a seller is willing to take for that same security. It should be remembered that when concluding a transaction, we buy from sellers, i.e. at the ask price, and we sell to buyers at the bid price.
- Leverage - multiplies the purchasing power of the capital deposited in the margin, allowing you to enter into transactions exceeding the value of the deposit. For example, a leverage of 1: 100 means that the value of transactions can be 100x greater, i.e. for example $ 1 deposit allows you to make transactions worth $ 100. However, the use of leverage is generally considered very risky and requires strict capital protection rules.
- Swap - is an agreement between two parties that specifies the rules of mutual payments, depending on a specific market parameter (e.g. interest rate, exchange rate). The basic type of this operation is a contract in which one party compensates the other for the consequences of changing the agreed parameter. In simple words, a swap is to leave a position open for the next day, for which the investor receives or pays interest. Virtually all transactions made on FOREX and on CFDs involve swaps.
- Margin - is the collateral that a trader has to deposit with their broker, which will cover the credit risk the holder poses for the broker. In a leveraged market, this means that the investor does not have to have the amount to cover the entire value of the transaction, but only the amount required by the broker. Changes in the value of a leveraged transaction are covered by the funds deposited in the margin and when these funds run out, the broker is forced to close the transaction.
- Long And Short Position - having a long position in a security means that the investor owns a given asset and expects that the price will rise in the future. A short position refers to the sale of an asset which the investor doesn’t own, but believes that the price will fall in the future. If the investor’s assumptions are correct, then they will be entitled to buy the asset at the lower price and make a profit. On the other hand, if the price rises, then the investor will incur a loss.
- Investment calculator - is a great tool that can help you in risk management. It helps in the automatic calculation of the parameters of your trade, such as pip value, margin, spread value and instantly determines all aspects of your trade, allowing you to make more informed trading decisions at a quicker rate.
- Take Profit & Stop Loss (including Trailing Stop) - Take Profit is an order for automatic execution of profit at a previously indicated level. As a rule, it is executed by a limit order opposite to your position. So if you close the short position at a profit (TP) with a buy limit order below the price, and the long position with a sell limit order above the price. Stop loss - a special type of pending stop order. The order is attached to a specific position and closes when the price goes up or down, reaching the Stop loss level. Trailing Stop (TS) is a special type of Stop Loss order that automatically follows a price that advances in favour of your order.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.