UNDERSTANDING CFD
TRADING TERMINOLOGY

Want to learn about CFDs? This article will help you to understand the language of CFDs and guide you through the most important CFD terminology.

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CFDs represent an advanced method of trading that offers a variety of advantages to traders. A useful starting point if you are looking to learn more about this type of trading is the terminology involved.  

Why knowing the key CFD trading terms is important

With any advanced trading method, such as CFDs, there are a few essential technical terms that communicate key pieces of information in a concise and specific manner.

This is useful if you understand the jargon — but it can also act as a barrier if you aren’t familiar with the terms involved.

We will walk you through each of the key terms to help you gain an understanding.

Key CFD trading terminology

Here is a list of the most vital CFD trading terminology:

Dividends

A dividend is a payment made by a company, returning a portion of its profits to its shareholders. This is frequently made in the form of a cash payment per share.

Corporate actions

A corporate action is essentially a change in a company that affects shares in the company. This may stem from a variety of reasons, such as simply changing a dividend payment, a stock split or restructuring the company (e.g., as a result of merger and acquisition activity).

Pips

A measure of price movement, originally representing the smallest price unit available in a commodity or currency. Modern precision pricing does allow for granularity beyond the historical pip, although the term remains useful as a common point of reference when discussing price movements or the associated value of a certain price movement.

For example, a pip for EUR/USD is a movement in the fourth decimal place of the exchange rate: 1.0558 is one pip higher than 1.0557, although the rate is quoted nowadays to a fifth decimal place, e.g., 1.05584.

Leverage

Leverage allows a trader to use an amount of money to command a larger value of a financial instrument.

Spread

The difference between the buying and selling price of an instrument that is currently available. 

Stop-Loss

A Stop-Loss is an instruction to close a trade if the market price moves to a less favourable level than is currently available.

Take-Profit

A Take-Profit is an instruction to close a trade at a target price — in other words, a level more favourable than is currently available.

Long/short positions

A long position is an open trade that makes more profit as the market in question rises. In other words, a long position is when you have bought a financial instrument and want it to go up in price. A short position is the reverse — an open trade (selling the market) that makes more profit as the price falls.

Ex-dividend date

An ex-dividend date is the first day when a stock is trading with the dividend stripped out of its price. To qualify for the next available dividend, an investor would have to buy the stock before the ex-dividend date.

Final thoughts

As we have seen, there are a number of terms that are particular to CFDs. Now that you are familiar with what a number of the key terms mean, you have moved closer to a deeper understanding of CFD trading.

Visit the eToro Academy to learn more about CFDs.

Quiz

FAQs

Do I receive a dividend if I hold a CFD position?

You receive any eligible dividends if you hold a long (buy) position in a stock. You pay any eligible dividends if you hold a short (sell) position in a stock.

Does it cost anything to leave a Stop-Loss or Take-Profit order?

No, there is no charge to leave either of these trading instructions to close a position.

Do I need to have a long position first in order to sell a security?

No, not with CFD trading. CFDs allow you to open a sell position first and buy it back later, in the hope of profiting from a drop in price.