Contract For Difference ( CFD) Guide
A Contract For Difference is an agreement between a Client and a Provider to exchange the difference between the opening and closing value of the trade.
CFD trading is similar to traditional buying and selling shares. If you do not want to sell your share /stock and want to profit when the price drop, you can use CFD as a hedge against the share. With CFD
- you receive dividends but you don’t actually own the share.
- no UK stamp duty to pay
- the price you see is the exact price of the underlying stock or the instrucments you are trading
- You can short or long the market, just like spread betting
- there is no expiration dates for the trade
- typical 5-20% deposit of the trade required for the trade
- you will receive interest if you go short
CFD Trade Index Example
Although indices are not quoted like ordinary shares with a BID and ASK price, CFD providers will quote a BID and ASK price ( or Buy and Sell ) for index CFDs and allow you to trade indices as a CFD.
Let's say the FTSE 100 is currently trading at 5199 and XYZ CFD.com is quoting a spread of 5198 – 6000 on the FTSE.
Say you believe the FTSE 100 index is going to rise and buy 3 Index CFDs at 6000. Let's say the margin requirement is only 10%,
Value of trade is 3 x 6000= £18,000 , but you only need to pay 10% which is £ 1800.
A week later the FTSE 100 index has risen and the daily FTSE spread is now 6300 – 6302 and you decide to close the trade and take your profit.
You place a sell or use the Bid price.
Your profit calculation is as follow:
Closing price - opening price = 6300-6000 = 300 points
3 CFD contracts = 3X £ 300 = £900
commission say flat fee -opening = 10
commission say flat fee -closing = 10
Interest for holding onto the long trade,
(libor+ spread say =10%) = 90
Overall profit = £ 900- 10-10-90 = £790
You repeat the above calculation if you want to trade CFD shares.
Contract For Difference Risk
As with spread betting, you can lose more than what you deposited, so try to use stop loss to limit your loss. You may receive Margin Calls by CFD providers to top up your account if the trade moves against you and your account do not have sufficient fund.
If they can not get hold of you, Contract For difference service provider may close your trade at a loss, even if say 1 minute later the market corrected itself and you were in profit by then. You still need to settle the loss.
Your contract for difference profits as well as trading equity share / options dealing are liable to tax. You can reduce this if you trade under a limited company, or incorporate one in tax
Interest -you pay interest when going long (Libor interest rate), so work out how much you gain versus how much interest you have to pay if you want to hold the trade for a little while.
Limit Your Loss - Stop Loss
Please use stop loss to limit your loss.You can specify at what price you want to close the trade if the trade is heading in the wrong direction.
Contract for Difference Providers
The following are list of CFD providers. Some are international based, so check it out to see if you can trade using CFD in your countries. If you follow
delta trading ,
market matrix turning points
, you can use CFD to trade commodities, currencies, stocks and indices via
- www.globalcfds.net-------from GNI
If you are unemployed and/or have money that you could not afford to lose, CFD is not for you either. Please read our disclaimer.
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