What Are Units in CFD Trading?
If you are venturing into CFD trading for the very first time, then it is likely that some aspects of this kind of trading might well confuse you a little bit. One idea that you might be struggling with is that of understanding the concept of units. So what are units in CFD trading and how do they work? Here we’ll give you a simple explanation.
What are CFD units and how do they work?
When you trade in CFDs, it does not work in quite the same way that it would when you buy shares in the actual stock market. When you trade on the ‘normal’ stock market and purchase a share, you will then take physical ownership of that share. When CFD trading however, this is not the case.
When trading in CFDs, you never actually buy or hold the underlying asset upon which the contract is based. You are instead entering into a ‘contract’ with the broker, a contract which is based upon the underlying price of a given share, commodity or asset. When the contract closes, the ‘difference’ in the price of the underlying instrument compared to the date when you agreed the contract is what will determine whether you have made a profit or a loss. For you to be able to make money from the contract then, some kind of value must be assigned to it to reflect the price of the underlying asset itself.
This is where units come in. The unit price in CFD trading is a price which is assigned to a contract by the broker and is designed to reflect or mirror the actual price of the underlying asset. Although the unit price accurately reflects the price of the underlying asset in most cases, this is not guaranteed and there can sometimes be slight discrepancies. It’s also worth mentioning here that although CFD trading and spread betting are often mentioned in the same breath, spread betting differs to CFD trading in that there are no units involved in spread betting, as is explained on the CMC Markets website.
What Currency are CFD units priced in?
As the price of a CFD unit is designed to mirror the price of the underlying asset, it would also make sense that the currency of a given unit should also mirror the currency of the that asset. With this in mind then, the price of a CFD unit will be shown in the relevant currency of the underlying asset it reflects.
To explain this more simply, we could say that if you are trading a CFD that represents a stock listed on the FTSE 100, the price for this would be shown in UK pounds, as this is the currency in which the underlying asset would be traded. If you are trading a CFD for a stock listed on the S&P 500, however, then the unit price for this would be listed in US dollars.
We can see then that the concept of trading CFD units is nothing to be fearful of. Unit prices have been designed so that they are easily understandable and so that they mirror, in the best way possible, the underlying asset upon which the contract is based not only in the price, but also when it comes to the currency of the unit.