Trading CFDs: Contracts for Difference

As we all know, CFD is an acronym for Contracts For Difference which is an agreement made between two parties in order to exchange the difference that is between the closing price and opening price of the contract. Similar to any equity trade, you can open and close trades at market prices on demand. Maybe you are very familiar with CFD and its many benefits. But what about CFD market? Want to have more information on it, then read the page.

Okay we are getting into a fairly specialised arena here, although CFDs are becoming more mainstream.

CFDs have become popular because they allow you to back your instincts and bet on a falling share price, as well as a rising stock movement.

Now, read this very carefully and over again if you don’t understand. CFDs – The theory a CFD is a very sophisticated wager.

There are no shares involved. Instead the broker agrees to pay the difference between the starting share price and the price when the contract is closed.

Hence CFD – contracts for difference. But beware, this is a two way bet. So, if with a CFD trade you get it wrong then you could end up owing a lot of money – often more than you had initially staked.

CFDs – So why not buy the shares? Well, you can buy a contract at a fraction of the face value of the shares – usually 10-25pc of the value.

CFDs are a much cheaper way of dealing shares, particularly if you are a frequent trader.

With CFDs there is also the advantage of not having to pay stamp duty.

However, you still have to pay capital gains tax on your winnings.

Many individuals compare CFDs (contracts for difference) to trading shares on margins which means purchasing shares and putting a security deposit that is typically about 10% to 20%.

Let me start with a risk warning. Leveraged investments through CFD accounts are not for non-experienced investors plain and simple. Leveraged investments declining in value force the investor (trader) out of the game through margin calls and are, therefore, a form of gambling with pretty much the same odds. For a number, it will end in tears. But if you do, do it with a small part of your capital.

If you are “long” a CFD and hold overnight you will also have financing charges because a CFD is a geared instrument i.e. you only put up say 10% of the cost price (depends on what you are trading) and are effectively borrowing the remainder. If you intend to trade Index CFDs be wary- it can be cheaper to trade the futures contract although then you have to trade with much bigger amounts.
You do pay financing charges but the balance of the cash that you would have spent on actually acquiring the shares instead of a CFD can be put on deposit. Depending on your financing rate the cost of the CFD could equal UK stamp after a few months

How experienced are you? CFDs are probably not appropriate for a buy and hold strategy as your cost of finance will over time negate the benefit of not paying stamp duty. Another benefit of CFDs is the ability to go short – not just individual stocks but the entire market (say by selling an ETF).

CFDs versus Spread betting

The major difference between the spread betting industry and Contracts for Difference s is their treatment by the tax man. Surprisingly CFDs are subject to normal Capital Gains Tax whereas spread betting is not. This does not mean, however, that spread betting is necessarily better option. If you should lose a spread bet acts as a complete loss, however if you have the same loss on a CFD, you can usually write off the loss against your capital gains for the current year. This can be a big advantage to the big hitters that may look at spread betting on the whole as a career choice.

Some of the key differences between spread betting and contracts for difference include tax, pricing and commission. In many countries, spread betting is considered gambling and thus there is no tax imposed on profit and loss gained from ‘trading’ spread betting. This can be a valuable advantage as we all know how high taxes are in some countries. The pricing between the products also differs. The ‘spread’ (difference between the price of the derivative and the underlying asset) can be higher in spread betting. This means that there is more slippage in the price and you are not getting as good of a deal on your trades. Plus there is an added commission built into the price of the derivative. With CFDs the price is almost, if not identical to the underlying asset, meaning you have much more control over your trades and the prices you come in and go out at plus there is a commission charged on your trade (differs depending on your broker but usually around $10 for trades under $10,000 and 0.1% for trades over $10,000).

DMA CFDs versus Spread Bets

The major difference between DMA and spread betting platforms is market transparency – apart of course the tax aspect. Opinions about the importance of transparency vary from one trader to the next, for me it is unequivocally a most important feature. I have both a DMA account and a spread betting account because there are pros and cons for both. But without any question, I use and depend entirely on the DMA account for pricing and market analysis.

I mainly use the financial spread betting account for entering occasional trades (mostly for longer term) or if I am testing a modification to my methodology. The advantage of the spread betting account is I can trade as little as £10/point and I can scale out at £1/point on the SPX500. I also use the spread betting account as a reserve hedge in case I lose connection with the DMA broker and can’t close a trade. This is especially important on a Friday where I don’t want to hold a position over a weekend, especially not a long position. Another advantage of spread betting is I can use a guaranteed stop which I would use if I felt there was a good reason to enter and hold a position over a weekend.

My advice would be to open both a DMA account and spread betting account so you can experience the difference for yourself. That is the only way you can make a fully informed decision about which one is best for you.

Contract for Difference Account (CFD Account)

Many people may want to experience the excitement of trading Contract for Differences or CFDs but are confused about the best place to start. CFDs, or Contract for Differences, work similarly to Financial Spread Trading, which allows the trader to speculate on the price movement on certain shares. Unlike normal shares however, you only need to lay down a small percentage of the overall share price (an ‘Initial Margin’). You can therefore speculate on a greater number of shares and increase your portfolio.

CFDs can be a difficult concept to grasp, which is why we have chosen the best CFD accounts below to help you through what can seem like a minefield. Our specially chosen CFD accounts now offer a range of quality services which allow easily management of your CFDs. With access to Online Share Trading, you are able buy or sell your CFDs effectively and efficiently in exchange for a small commission fee on CFD trades. These services may include:

  • Access to thousands of international stocks and shares.
  • Access to the tools needed to closely monitor and analyse your CFDs such as fast  professional platforms and real time stock markets online.
  • Instant execution during market hours.

Because CFDs firms or accounts have no set commission charge, it essential to compare different CFD accounts to find the most competitive and equally effective account for you.

CFD Dealing

As the term Contract For Difference or (CFD) suggests, a CFD is an agreement between the buyer and seller to exchange the difference between opening and closing prices of a share when the contract ends. Unlike normal shares, in CFD dealing you are not buying the underlying assets of a share. You instead, are speculating on the on the movements of particular share, market or sector.

There is no large initial purchase of a CFD due to the fact that you do not own it outright. CFD dealing instead requires you to lay down a small percentage of the share price, or an ‘initial margin’. This allows you a greater leverage to purchase a greater number of CFD shares. Dealing in CFDs allows you to expand your portfolio as you are able to deal in a broad range of commodities. This can be as diverse as having CFDs in shares, indices, currencies, commodities, sectors, interest rates and options.

By choosing one of our specially selected partners, you can make sure you are choosing the right CFD account provider, intern receiving the best CFD dealing suited to you. This may maximise your chances at successful CFD dealing.

Online Share Trading and Contracts for Difference (CFD)

The joy of the internet means that investors can now experience and get involved in the fast paced environment of the stock exchange and CFD dealing in the comfort and security of their own home. Online share trading is becoming more popular than ever, thanks to fast and effective online share trading sites offered by different CFD accounts. This means that fluctuating markets can be watched in real time, whilst instant access to your CFD accounts means you can trade your CFDs with a simple click of a button. In fact, a recent survey found that 65% of investors, are now conducting their own research and investing directly into the stock market through online share trading.

Like all investment opportunities such as loans, mortgages and insurances, it pays to shop around when choosing an online share trading site. Different CFD account providers may offer lower commission fees for CFD trading and different incentives to join such as an introductory commission-free rate on all CFD dealing.

With the increasing popularity of online share trading sites comes a growing number of competitors who similarly want to buy and sell their CFDs. Minimise the competition by talking to our specialist CFD account providers, who will not only provide state-of-the-art research and up-to-the-minute information services but will give you access to a wealth of information, tips and advice.

To bring the global markets within your easy reach, get involved in online share trading by selecting a reliable CFD account provider today.

  1. No comments yet.
  1. No trackbacks yet.