Contracts for Difference: What is CFD Trading?

Contracts For DifferenceContracts For Difference

www.contracts-for-difference.com

What is a CFD?What is a CFD?

An agreement:between two parties to exchange, at the close

of the contract, the difference between the opening and closing price of the contract

multiplied by the number of shares specified with the contract.

Parties in a CFD Parties in a CFD transactiontransaction

There are always two parties:

• The LONG partyAn investor who opens a position by BUYING a

CFD

• The SHORT partyAn investor who opens a contract by SELLING a

CFD

Why CFDs v. Physical Why CFDs v. Physical Shares?Shares?

• Margin Flexibility (CFDs are traded on margin)

i. You can take positions in the market 5 times greater value than your normal cash trade, or …

ii. You can trade your normal size and deposit only 20% of the value as initial margin

• Long or shorti. BUY stock (go LONG), or …

ii. SELL stock (go SHORT)

depending on your market sentiment

Why CFDs v. Physical Why CFDs v. Physical Shares?Shares?

• No stamp dutyAs you are not buying physical shares, you are not liable for stamp duty (under current UK legislation) = save ½% per trade

What stocks can I trade?What stocks can I trade?

CFDs can be traded on all stockswith a market capitalisation above:

• UK = £50 million market cap

• European = €100 million market cap

• US = $1 billion market cap

How do CFDs work?How do CFDs work?Normal Share Trading:

BUY SELL

10,000 shares

10,000 shares

10,000 shares

10,000 shares

CFD Share Trading:BUY SELL

10,000 shares

10,000 shares

OPEN TRADE

CLOSE TRADE

OPEN TRADE

OR OPEN TRADE

… open trade on buy side or sell side

LONG SHORT

DividendsDividends

• Dividends still apply even though you do not take physical delivery

How does Margin work?How does Margin work?

Account value £100,000Stage 1

Open a £50,000 trade(requires £10,000 as a 20% good-faith deposit)

Stage 2

Stage 3 Left to trade:

£90,000

Initial Margin

£10,000

Variation Margin

£ profit/ lossreal-time

Stage 4 Close position- Profit/ loss returned with initial margin

£90,000

+ £10,000 Initial Margin

+/- £ profit/ loss

CostsCosts

• CommissionEvery trade accrues a commission charge

• InterestAs your broker is funding 80% of the contract value, you pay or receive a minimal interest charge

i. Long positions – you pay a spread over LIBOR on the 80%

ii. Short positions – you receive a spread under LIBID on the 80%

CFD Trading RulesCFD Trading Rules• Trade with money you can afford to lose

• Do NOT over leverage

• Risk Management – make sure trades are at least 2:1 in your favour

• Use STOP LOSSES – limit your downside, only moving a stop loss to REDUCE risk

• Know your entry AND exit levels before executing a trade

• DISCIPLINE – develop out a system that works for you and stick to it