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CFDs - Contracts for Difference

CFD Trading – A cost-effective way to invest with maximal exposure

CFD trading is an easy and convenient way to trade on international markets. It is also a flexible alternative to other types of trading, giving you access to multiple markets from a single account. CFDs are traded on margin so you can enter the market with only a fraction of the actual capital needed. You can use CFDs to speculate on the future movement of market prices, regardless of whether they are rising or falling.

What is a Contract for Difference (CFD)

 A Contract for Difference (CFD) is an agreement between two parties to exchange the difference between the current value of an asset and its value at the buy/sell time. It is a product that allows you to profit from the price movements of shares, indices, futures, and other financial instruments, without actually owning them – there is no physical purchase of the asset. This means that if you buy CFDs on Vodafone shares, for example, you do not acquire the actual shares. Nevertheless, you can profit from the difference between their buy and sell prices.

What is Margin (or Leverage)

One of the advantages of leveraged trading is that you can acquire a position that is much larger than your account equity. This is known as margin trading, which is the ability to control more funds (borrowed from your broker) than the amount of your deposit, in order to increase the potential return of an investment. Contracts for Difference can be traded on margin.

With a margin requirement of 5% (leverage of 1:20), for instance, you can trade with £10,000 by having just £500 (5% margin) in your account. This means that you can take advantage of the smallest market movements by controlling more money than you actually own.

While leverage can be advantageous in increasing your profits, it can also significantly increase your losses, so it should be used with caution.

CFD trading costs

A major advantage of CFD trading is the lower trading costs, as opposed to traditional share trading.

Not only are CFDs traded on margin, thus requiring a fraction of the full capital to open a position, but also the minimum amount to place a trade is one CFD.

Most brokers charge a commission if you traded CFD that has an underlying asset that is listening on the stock exchange like shares and ETFs.

The commissions associated with CFD trading in shares and ETFs are lower than those paid for trading on a stock exchange. 

For example, if you purchased Share CFDs of HSBC Holdings valued at, say, £3,000, you would pay a commission of only 0.10%, or £3 (the commission for trades above €10,000 is 0.05% of the trade value). Because the margin requirement is 5%, you would be required to have only £150 in your account to open that position.

Trading CFDs on margin involves another typical cost: paying interest when you leave your position open at the end of the trading day (also known as a rollover fee). The amount of this cost is determined mainly by the prime interest rate of the country in whose currency the base asset is denominated, plus/minus the premium/financing determined by the broker. Thus, it is possible that in some cases you will receive interest for open positions, rather than pay it.

CFDs Explained

• CFDs are available on a huge range of different assets including global indices, stocks, sectors, currencies and commodities.
• CFDs have no fixed expiry date or contract size. Positions are renewed at the close of each trading day and maybe rolled forward indefinitely provided there is sufficient margin to support it.
• Trades are conducted on a leveraged basis so you only need to deposit a percentage of the total value of the position value. Leveraged trading means potential profits and losses are magnified.
• While a trade remains open, your CFD account will be debited or credited to reflect daily financing costs and dividend adjustments.
• You can go long or short. If you go long, you are entitled to dividends and pay daily interest (financing), if short, the reverse is applicable.
• CFDs reflect the price movements and pricing of the underlying regulated market upon which they are based. You usually trade at the current cash market price.
• There is NO restriction on the entry or exit price of a contract for difference, there is no time limit to exchange the price difference in the asset, nor is there any restriction on buying first or selling first. There is no ownership of the underlying instrument of the underlying asset.
• Positions can be closed at any time during normal market hours.
• Low cost. On most markets, you just pay the spread or a commission on each side of your trade i.e. a commission for opening a trade and a separate commission for closing the trade. This is usually calculated on the underlying contract value.