Drawbacks of trading CFDs

The capital in a CFD cash account can be lost in a short time due to leverage. An investment requires careful and constant monitoring. It has credit risk with the counterparty, as explained in the risk document.

What are CFDs?

Q: Duration of a CFD

Generally, CFDs do not have an expiration date , meaning when you open a position using a CFD, it remains open until you decide to close it, except in the case of CFDs on futures and certain commodities, which do have a fixed settlement date. For example, if you short 30 shares in company XXX using a CFD, the position in the CFD will be closed by executing a buy order in a CFD for 30 shares of company XXX. It is also important to note that there are certain events that can trigger the automatic closing of a CFD position , such as not keeping the minimum required capital in the margin account. Before your position is automatically closed out, you will receive notifications warning of your decreasing Margin so you can deposit more funds in the account and keep your positions open.

A Contract for Differences (CFD) is a derivative investment instrument that can be used to speculate on the movement of the reference price of an underlying asset without directly trading the underlying asset. CFDs generally involve stocks, indexes, currencies or commodities.

CFDs are difference contracts between two parties in which the buyer agrees to pay to the seller the difference between the current value of an Underlying Asset and its value when the position is closed, multiplied by the agreed number of contracts. In other words, when you trade using CFDs, you are not buying or selling the Underlying Asset itself. On top of this operation, the currency conversion to euros would have be considered if the underlying asset is traded in a non-euro currency.

CFDs are also leveraged, meaning they let you trade without having to put up the full cost of the underlying asset, depositing only the Margin required for the trade. This feature of CFDs can be both an advantage and a drawback, since it makes this financial instrument a complex, high-risk product, meaning the investor can quickly lose their money due to the leveraging effect.

With CFDs, you can open a long or short position in a wide range of Underlying Assets that are normally not accessible or available for retail customers. For example, underlying assets such as EUR/USD.
They let you trade without having to put up the full cost of the underlying asset, depositing only the Margin required for the trade (leverage).
Ease of execution.
Negative balance protection: your maximum loss is limited to the capital deposited in the CFD cash account.

The capital in a CFD cash account can be lost in a short time due to leverage.
An investment requires careful and constant monitoring.
It has credit risk with the counterparty, as explained in the risk document.

If, after your market analysis, you conclude that the Reference Price of the Underlying Asset is going to go up, your CFD strategy would have you open a long position with a CFD through a Buy order.

Once the buy order is executed, you hold a long CFD position in a certain Underlying Asset. In this long position, you will make a profit from the rise in the price of the Underlying Asset, but you will lose money if the price of the asset goes down. To close all or part of a long position in a CFD, you have to place a sell order.

By contrast, if you think that the price of the Underlying Asset is going to fall, your CFD strategy would have you open a short position with a CFD through a Sell order.

Once the sell order is executed, you hold a short position in a CFD for a certain Underlying Asset. In this short position, you will make a profit from the fall in the price of this Underlying Asset, but you will lose money if the price of the asset goes up. To close a short CFD position in whole or in part, you would have to place and execute a buy order in the market.

The spread is the difference between the purchase and sale price for the same CFD, with the purchase price always being higher than the sale price.

Following on from the previous example of a CFD on the GERMANY 30 index, we see that the Reference Price of the Underlying Asset has not moved, and the result of the trades made was a loss equivalent to the spread; that is, one dollar per contract. Therefore, to make a profit with CFDs, the market would need to move in your favor in each case (up if you are long or down if you are short) by an amount greater than the spread. Therefore, the spread is one of the key costs involved in trading with CFDs.

The spread can be affected by several factors, including liquidity, which determines how easily the Underlying Asset can be bought and sold.

High liquidity results in a tighter spread, while low liquidity can lead to a wider spread. The spread can vary over time. If there are no prices available for the Underlying Asset, for example, a stock for which trading has been suspended, BBVA Trader CFDs may not allow opening a position in the underlying asset using CFDs.

Other costs involved in CFDs:

- Holding a CFD position overnight entails a financing cost that may be positive or negative, depending on whether the position is long or short and on the benchmark interest rate.

- Some CFDs (stocks and futures in the case of BBVA Trader CFDs) include a "Brokerage Fee", which is charged to the customer's CFDs Cash Account when the trade is executed. This is a fee based on the notional value of the trade whenever a CFD position is opened or closed.

See the corresponding fee schedule.

Generally, CFDs do not have an expiration date, meaning when you open a position using a CFD, it remains open until you decide to close it, except in the case of CFDs on futures and certain commodities, which do have a fixed settlement date. For example, if you short 30 shares in company XXX using a CFD, the position in the CFD will be closed by executing a buy order in a CFD for 30 shares of company XXX.

It is also important to note that there are certain events that can trigger the automatic closing of a CFD position, such as not keeping the minimum required capital in the margin account. Before your position is automatically closed out, you will receive notifications warning of your decreasing Margin so you can deposit more funds in the account and keep your positions open.

Any profit or loss in a CFD trade comes from the difference between the opening and closing prices of the position in a CFD, multiplied by the number of contracts negotiated minus the brokerage fees, as well as, where applicable, the financing cost. If the Underlying Asset is not traded in euros, the gain or loss will be changed to euros at the exchange rate in effect at the time of settlement.

One of the main features of CFDs is the Margin requirement.

Trading CFDs lets you hold a position on a given underlying asset without putting up the entire amount that would be required to invest directly in the Underlying Asset.

The amount of money you need to open a position using a CFD is called the Margin, which is calculated as a percentage of the corresponding value of the Underlying Asset.

While the CFD position is open, the associated margin amount will be locked in your account and will not be available for any other trades. Once the CFD position is closed, the Margin will be freed up and added to the available trading capital.

The Margin required when you open a position in a CFD is called the Initial Margin. As long as the position remains open, the Margin is continually recalculated based on changes in the Reference Price of the Underlying Asset.

If the market moves against you, the balance in your account may not be sufficient to cover the Margin requirements. If this happens, the BBVA Trader CFD tool will let you know of the risk so you can close out your CFD positions and/or add sufficient funds to your account to cover the Margin requirements. If these Margin requirements are not satisfied, any open CFD positions will be closed automatically to keep you from losing more capital than you initially paid in.

To trade CFDs it is important to understand that although the capital required to hold a CFD position is only a percentage of the value of the Underlying Asset, profits and losses are calculated based on the full exposure of the Underlying Asset. Therefore, CFD trading requires constant monitoring and tracking of your investment.

See examples of CFDs

Please see the important information in the following attachments: Legal Notice.

What are CFDs?

Advantages of trading using CFDs

Drawbacks of trading CFDs

Long Position

Short position

Spread and costs

Duration of a CFD

Profit and loss

Margin

Leveraging