AbOUT CFD’s

What is a Contract for Difference?

Contracts for Differences are as simple and user friendly to trade as they are popular. Ideal for both speculation and hedging of stock portfolios, CFDs became available to individual investors in late 1999. Growing rapidly in popularity, CFDs are proving an attractive means of gaining exposure to the economic performance and cash flows of individual equities without the need to invest in the physical share.

It is estimated that CFD trading in the UK now accounts for at least 30% of all London Stock Exchange turnover.

But what exactly are CFDs? A CFD allows a trader to receive all the benefits of owning stock – without having to physically own the stock. Unlike share trading, a CFD contract grants no ownership rights.

It is an agreement (made between two parties) to exchange, at the closing of the contract, the difference between the opening and closing price of a share, multiplied by the number of shares detailed in the contract. 

As a CFD delivery can't be taken, the trader has to settle the difference between where he bought the contract and where he sold it. The difference is either profit or loss. It’s as easy and profitable as that! 

With the possibility of making money during both rising and falling markets, the CFD day trading market has seen a tremendous growth, and has become an attractive instrument to add to any financial portfolio.

Every CFD has a contract value. It is the number of shares in the contract multiplied by the price of the underlying share. The Contract Value will change in line with the changes in the price of the underlying share. A CFD is valued daily at the close of business mid-price of the underlying share.

Where does the concept “CFD” originate from?

The CFD concept originated during the 1970’s in the UK, firstly within the wholesale sports markets, and then within the financial markets. Today CFD's contribute up to a whopping 40% of the UK FTSE exchange. 

Can I take or make delivery of a stock by trading an Equity CFD?

No. A CFD is a financial instrument linked to the underlying share price. You will not acquire any rights or incur any obligations relating to the underlying share.

What Margin is required for CFD trading?

Margins start from 1%. Margins depend upon both the volatility of the market and volatility of the individual stock. Positions are marked to market, daily and the initial margin has to be maintained. In cases of adverse market movement investors are liable to pay additional margin. This high leverage means that only experienced traders are able to open CFD accounts.

Will I have to pay Stamp Duty when buying an Equity CFD?

No. As no purchase of the underlying shares is involved no Stamp Duty is payable.

How often can I trade?

Provided that an account is sufficiently funded it is permissible to trade as frequently as desired. Trading will normally only be possible during the hours that the relevant stock market is open. 

Can I buy or sell a CFD?

Yes. You can buy (go ‘long’) a CFD and will make a profit if the value of the CFD increases. If you sell (go ‘short’) a CFD, you will make a profit if the value of the CFD decreases. 

What markets can I trade?

Individual Equities, Stock Indices, Commodity Futures, Bonds and Interest Rates, and Forex on most of the world major exchanges

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