CFD Trading Guide
Before CFDs were launched, you were only able to make a profit from share price increases when they rose. The introduction of CFDs gave you more options and allowed you to make a profit (or loss!) when prices rose and fell. We would like to take this opportunity to introduce CFD trading to those of you who may not yet have looked at them.
So what is a CFD?
A CFD ('Contract for Difference') is a financial instrument that allows you to speculate on movements in the price of an individual share, a market index, a currency or a precious metal. However, with CFD trading, you are not investing directly into these markets, but are buying and selling a notional 'contract' that replicates movements in the price of the underlying share or market index. Your profit or loss comes from the difference between the price at which you buy the contract and the price at which you sell it.
A CFD also allows you to trade a position whilst only putting down a deposit of between 5-10% the value of the underlying investment - typically 5% for market index investments and 10% for shares.
What are the risks?
You can potentially enjoy big returns trading in CFDs. Equally, there is the potential for large losses. Remember:
· You can lose more money than you invest (except when using a 'Limited Risk Account' where your liability is restricted to what you deposit into your account)
· You may need to make further deposits at short notice if your positions move against you
· CFD trading is not suitable for everyone, so make sure you understand the risks
Trading shares vs. trading CFDs
Obviously there are a number of significant differences between trading shares and CFDs and it's important that these are fully understood. The following table highlights the most important issues that you should be aware of:
|
Criteria |
Shares |
CFDs |
|
Trading Opportunities |
Trade shares in individual companies or collective investment funds. Profits only available from a rising share price, since short selling is not generally available. |
CFDs can be linked to individual shares, market indices, currencies or commodities. Trade 'long' if you think a share or index price will increase. (This means that you'll make a loss if the price goes down.) Trade 'short' if you think a price is set to fall - giving you the opportunity to make a profit in a falling market. (This of course means that you'll make a loss if the price goes up.) |
|
Share Ownership |
When you trade shares, you are buying or selling a percentage of the underlying company. |
When you trade CFDs, you are not buying shares in the underlying company, but are making a financial arrangement, or 'contract', with the broker. |
|
Stamp Duty |
Stamp Duty is a government tax charged at 0.5% on all purchases of |
Trading CFDs does not involve buying shares - and is therefore exempt from Stamp Duty. |
|
Margin and Payment |
Share trading requires an outlay of 100% the value of the investment at the outset - i.e. buying £10,000 of shares requires a £10,000 outlay. |
With CFDs, you only need to provide an initial margin of between 5-10% the value of the trade - i.e. trading a position of £10,000 shares requires a 10% initial margin (of £1,000), whilst trading a market index generally requires a 5% initial margin (in this case £500). |
|
Potential Returns/Losses |
A typical 10% movement of a share price will give you a 10% profit or loss on your investment. |
The high degree of leverage inherent in CFDs means that a typical 10% movement of an underlying share price will give you a 100% profit (or loss) on your initial margin. You should understand the risks before you apply for an account. |
|
Maximum Losses |
In the unlikely event of a company going bankrupt, your maximum potential loss would be limited to your initial investment. |
The risks associated with trading CFDs are obviously higher and you could lose a lot more than your initial investment. It is therefore very important that you understand the maximum potential loss on both long and short positions. For a long position your maximum loss is the total exposure you have bought. So if you are trading a position of £10,000 shares using a £1,000 deposit, your loss could be £10,000 or 10x your initial deposit. With a short position you will lose if the share price rises - so your losses could be unlimited. It's very important that you keep a close eye on your open trading positions and use Limits and Stop Losses to protect yourself. |
|
Order Types Available |
Choice of Market Orders, Limit Orders and Stop Loss Orders to exercise control over the execution of your trades. |
Same range of Market, Limit and Stop Loss Orders, as well as an additional feature known as a 'Guaranteed Stop' order to protect your maximum exposure. Other order types are available. See our website for more. |
|
Dividend Policy |
Dividends credited to your account when paid or re-invested as requested. |
Dividend adjustments are added to your account if you are holding a 'long' position and deducted from your account if you are 'short' on a stock. |
|
Investment Duration |
Share trading is for both the short-term trader and the long-term investor. |
CFDs are mainly used by customers who trade in and out of positions frequently. |
It is important that you understand the high-risk nature of these investments. You should make sure to know all the details regarding this service
And once your account is open, you can trade a wide variety of markets:
|
Category |
Market |
|
Equities |
US - NYSE & NASDAQ quoted stocks with market cap > US $500 mil |
|
Indices |
FTSE 100, Wall St, S&P 500, Nasdaq 100, Dax 30, CAC 40, Swiss Mkt, IBEX 35, MIB 30, Euro Stoxx 50, Nikkei 225, Hang Seng, |
|
Currencies |
EUR/ USD, USD/ JPY, USD/ CHF, GBP/ USD, AUD/ USD, USD/ CAD, EUR/ CHF, EUR/ GBP, EUR/ JPY |
|
Commodities |
Gold, Silver |
Again, please remember that CFD trading represents a high-risk investment.
