Contracts For Difference

Contracts for Difference - CFDs - first entered the UK retail market at the end of the 1990’s and they have since become the preferred trading tool for the active private investor.

Equity CFDs are a very simple type of derivative that offer all the benefits of trading shares without having to physically own them . In essence, they are contracts that mirror the performance of the underlying cash market and as with trading the physical shares, the profit and loss is determined by the difference between the purchase price and the selling price .

Advantages of CFDs

Margin Trading - In many respects, trading CFDs is very similar to traditional share trading, the most critical difference from a trading perspective is that CFDs are margined products.

Unlike share traders, who have to pay the full value of their positions, a trade using CFDs only requires a deposit or margin balance, which for most stocks is 10% . For example, a deposit of £1000 would be all that is required to take an equivalent position of £10000 in the underlying equity . This represents a more efficient use of capital because,even though the CFD investors outlay is small in comparison with the equivalent physical trade, he will still be exposed to the same absolute profit.

Hedging - If you own physical shares which you don’t want to sell, even if you expect their value to decrease, you can open up a short position using a CFD on the individual share. In this instance you will compensate the losses from your physical shares by the profit made with the corresponding CFD

Short Selling - CFDs offer the opportunity to trade the markets in both directions. Therefore traders can use CFDs to profit from having a short position when the price of the share goes down .

No Stamp Duty - CFDs do not attract stamp duty as no share transfer takes place and the investor thus gains an automatic saving of 0.5% over the equivalent purchase of traditional shares.

Market Prices - All our quoted CFD market prices will correspond to the underlying share price on the relevant exchange .

No Expiry - Unlike Futures contracts or Spread Betting an open CFD has no expiry date so investors can maintain their position, long or short, for as long as they wish.

CFD Example:

• Investor A believes that Vodafone (VOD.L) is undervalued and is therefore expecting the share price to rise.
• He therefore opens a position and buys 10,000 shares at 140 pence as a CFD.
• Due to the fact that the position is a CFD, Investor A is required only to put up a 10% initial margin for the trade, costing
  the investor in this case £1,400. The commission on the position works out at £35 (14000 X 0.25%).
• In order to limit any losses that may occur as a result of an unexpected dip in the market, a stop loss is implemented. The stop loss price is set at £1.36. Therefore profits can be protected over the period the position is open preventing any unexpected losses.
• Five days later, Investor A's prediction rings true as Vodafone rises from 140 pence to 145 pence. He decides to close the contract at this price by selling 10000 Vodafone CFD's at 145 pence. The financing for the position works out at 6.25%, costing £12 for the 5 day period.
• The commission on this position works out at £36.25 (14500 X 0.25%).
• The Profit on the Trade is calculated as follows:

Opening Price	140p
Closing Price	150p
Difference	10p
Gross Profit	£1000
Commision	(£71.25)
Financing Charge	(£12)
Net Profit	£916.75