Cfd analysis
Family I · Instruments
Not to be confused with cfd, cfd trading, cfd on gold.
CFD analysis is the process of assessing a contract for difference before or while holding it. A CFD is a derivative that pays the difference between the entry and exit price of an underlying asset, so analysis must cover both the underlying market and the contract's own terms. The contract terms, including margin, financing and spread, vary by broker and jurisdiction.
What the analysis covers
Because a CFD tracks an underlying asset without owning it, analysis has two layers. The first is the underlying: price level, volatility, liquidity and any scheduled events that move it. The second is the contract: the margin rate, the financing charge applied to the notional value, the bid-ask spread and any commission.
- Underlying layer — direction, volatility and event risk of the referenced asset.
- Contract layer — margin, financing, spread and commission, all of which vary by broker and instrument.
- Combined layer — how a given price move converts into a percentage return on the margin posted.
Worked example
A long CFD on an index quoted at 5,000 with a 5% margin rate and a 0.05% overnight financing charge on notional value.
The same leverage magnifies a fall: a 1% drop plus financing produces a loss of about 21% of the margin posted.
Limits of the analysis
CFD analysis cannot remove the effect of leverage. Margin rates, financing formulas and spread widths are set by the broker and differ between firms and countries, so any figure used in analysis must be taken from the specific contract's terms rather than assumed. Regulatory restrictions on leverage and on which clients may hold CFDs also vary by jurisdiction.
Often confused with
- cfd
- A CFD is the contract itself, while CFD analysis is the assessment of that contract; the visible sign is that one names an instrument and the other names an activity.
- cfd trading
- CFD trading is the act of buying and selling the contracts, whereas CFD analysis is the evaluation that may precede or accompany those trades; the visible sign is that trading produces fills and analysis produces figures.
- cfd on gold
- A CFD on gold is one specific contract referenced to the gold price, while CFD analysis is the general method applied to any such contract; the visible sign is that one names a single underlying asset and the other names a process.