What is CFD trading and investing?

CFD, short for Contract For Difference, is a derivative financial instrument enabling you to gain exposure to financial markets without physical ownership of the underlying asset. It is an agreement between you – the trader and the provider – to exchange the difference in value between the opening and the closing level of a particular contract.

What is Spread betting?

Spread betting is a form of derivative trading and investing enabling you to gain exposure to the financial markets without physical ownership of the underlying asset. Rather than buying or selling the underlying asset you are simply taking a position on whether the market will rise or fall.

CFDs and Spread betting are financial products which allow you to take positions in markets in a simple, easy and direct way. They are usually leveraged so only a fraction of the total value of your investment needs to be deposited in your account in order to trade and the remaining amount will be financed by the provider. As part of our commitment to empower our clients, we allow clients to trade with less leverage through our Variable Margin offering.

Here are the benefits of CFD trading and Spread betting for you at a glance:

• Variable margin only with us – you can control the leverage you use
• Extremely low lifecycle cost
• Notional value trading - allowing you to look at your trades from the perspective of the maximum exposure
• No expiry date
• The instrument price reflects the price of the underlying market
• Flexibility – you can enter and exit the position at any time you decide
• Limited risk – you can apply stop loss orders
• No commissions to pay – all costs are incorporated into the spread

 

 

CFDs fully emulate the price of the underlying asset, which is taken directly from the underlying exchange or delivered by the liquidity providers.

Spread

As we are compensated by the spread, i.e. the difference between bid and offer, or the sell and buy price, a mark-up is added to the underlying price.

Spread is considered the main cost for the trader. By trading with us, you do not pay commissions on the top of the spread as this is already incorporated. What is more, our spreads are tight and fixed (T&Cs apply).

Example spread

Let’s look at the benchmark index of the UK’s leading companies, the UK100, which represents the underlying FTSE100. Our spread equals 1 point. In order for you to make profits the market has to move by at least one point. So, if you bought while our quote was 5903.50-5904.50, the market has to move by one point in your favour before you start making profit. If it moves to 5904.50-5905.50, you break even, as you will sell at 5904.50 to close the position. Any price higher than that means you are in profit. If the spread was 2 points, then you would need to wait for the markets to move at least by 2 points before starting to make any profits. Hence, the smaller the spread, the quicker you may get into profits as it takes less of a movement.

 

Leverage

You can fully participate in the price action of the underlying instrument without having to contribute the full amount usually necessary for the transaction. As a trader/investor you only provide a fraction of the total amount and as the rest of the investment is provided by us, you are still able to fully participate in the total income from the investment.

Example Leverage

Suppose that the FTSE is now at £5000, the margin is 1%, i.e. £50 you need to deposit and you are long. This gives you a leverage of 100, meaning that you move a total value 100 times larger than your initial outlay. Should the market move by 1% to 5050, you would have made a profit a 100 % (by investing 50 you gain 50). This may also work the opposite way. If the market moves down by 1%, to 4950, you lose 100% of your initial capital. i.e. 100% of your investment. The application of leverage magnifies the price movements in the markets. It can magnify both the profits as well as losses. The losses can exceed your initial outlay.

A corporate action is an action carried out by a company that affects its stakeholders. For CFDs.com’s clients, any open positions can be affected by a corporate action. There are various types of corporate action; the most common being dividends, stock splits, and mergers and acquisitions.

Dividends

Dividends are the most common type of corporate action that will affect an open position. For a list of upcoming dividends, please click here.

If you hold a position in a company that has decided to distribute a part of its corporate profits to its shareholders, this will be reflected in your position accordingly. Depending on the direction of your position, you will either be eligible to receive the payment or you will need to pay. The dividend adjustment is applied to your account if you still hold your position after the close of the day before the ex-dividend day (also called ex-div). The ex-div day is the first day when the share trades without the dividend.

For long positons in UK companies, you receive 100% of the announced dividend††. For non-UK companies, the dividend may be subject to a withholding tax. For example, a US stock dividend is subject to 30% withholding tax. As a resident of a territory holding a double tax treaty with the US, we claim a 15% tax benefit and pass it on to you. Therefore, you’ll be credited with 85% of the announced dividend rather than 70%.

 

†† Tax law can be changed or may differ if you pay tax in a jurisdiction other than the UK

Example – long position

Holding a long position in 20,000 shares of XYZ Corporation will entitle you to the dividend payout, providing you hold your position after the close of the day before the ex-div date. If the company is going to pay a dividend of 12p per share, and assuming it is a UK company, you will receive 100% of the dividend declared. So a total of £2,400 will be credited to your account. And it will be tax free!

Example – short position

While you are short in 35,000 shares of ABC Company, it goes ex div – the company decided to pay 5p per share. As you need to pay 100% of the declared amount, a total of £1,750 will be deducted from your account.

Other types of corporate actions

Whilst dividends are the most common type of corporate action, CFDs.com will adjust open positions on other types of corporate action. These include, but are not limited to:

• Stock split: the number of outstanding shares is increased by a multiplier and the share price is reduced by the same multiplier
• Reverse split: the number of outstanding shares is decreased by a multiplier and the share price is increased by the same multiplier
• Mergers: two or more companies coming together to form a new company, and existing shareholders of the merging companies will maintain a holding in the new company
• Acquisitions: one company (the acquirer) takes over another company (the target) which then ceases to exist but the acquirer’s stock continues to be available for trading
• Spin-off: a company sells a portion of its assets or distributes new shares to create a new company
• Rights issue: a company will offer new or additional shares only to current shareholders

For more information on how a corporate actions could affect your account, please contact our Client Services team via info@cfdstrader.co.uk

 

Other costs, apart from the spread, you need to take into account when dealing in CFDs or Spread betting are the daily financing charges. Financing charges represent the cost of borrowing the capital that is needed in order to open a position. Positions that remain open overnight are subject to those charges, and are incurred on a daily basis.

A long position attracts the financing charges, as effectively, by depositing initial margin, you borrow capital from us to cover the rest of it (i.e. the difference between the initial margin and the total value). For short position, on the other hand, financing interest may be credited to your account, as the opposite applies, meaning, you lend capital to us.

Calculation of financing

Positions held at our designated ‘financing time’ are subject to a financing charge or financing credit (collectively, "financing transactions"). In addition, positions that are held on Friday at this time will attract a three day financing charge/credit to account for the weekend.

Note: Positions on futures do not incur such treatment as the pricing of the underlying instrument takes any cost of carry into account already.

Long positions attract a financing charge; short positions may receive a financing credit (subject to underlying interest rates).

A financing transaction is calculated based on the notional value of a position and the Effective Financing Rate. The Effective Financing Rate is commonly the Alternate Reference Rate ('ARR') of the asset currency, plus (for long positions) or minus (for short positions) a financing ‘spread’ (currently a daily spread of 0.0098% +ARR (0.0096% +ARR for GBP denominated assets).