Why CFDs
Why CFDs?What are CFDs?
The Advantages of CFDs
The Risks of CFDs
What is Margin Trading?
Why CFDs with E*TRADE?
Why CFDs?
Contracts for Difference (CFDs) offer traders the following benefits:
- No Stamp Duty
- Trade on Margin
- Sell Short, as easily as Buying Long
- Trade International Markets
- Instant Trading
A Contract for Difference (CFD) is a derivative based on an underlying stock or index. A CFD is researched and traded in exactly the same way as a stock. For example, a Vodafone CFD will follow the movements of the Vodafone stock itself, and will be effected positively or negatively by the same factors as the underlying Vodafone stock, such as market news, economic and political factors.
A CFD is an agreement between two parties to exchange the difference between the nominal value at the opening of a trade and the nominal value at the close of a trade. For example, if a 1000 CFDs of Vodafone bought at £1.00 (nominal value £1,000) close out at £1.01 (nominal value £1010), the difference (and profit on the trade) is £10.
The Advantages of CFDs
If the CFD price is moving like the stock price, why would you trade a CFD on Vodafone instead of just trading the Vodafone stock itself? There are a number of reasons:
- Because you do not own the physical stock itself, you are not required to pay Stamp Duty.
- A CFD need not be paid for in full. You can buy or sell stock for much more than the deposit you have invested with us. This enables you to cost effectively gear up your investment exposure when required - up to 10 times. We require a minimum margin deposit of 10% of the combined face value of your stocks - in effect you can buy GBP100,000 worth of Vodafone CFDs, although you only have a GBP10,000 deposit with us.
- Since the CFD is a derivative, you can sell it just as easily as buy it - no worries about borrowing stock.
- With E*TRADE you can trade CFDs in over 13 exchanges covering the UK, European and US markets.
- As a derivative, we will quote you a price that you can trade on instantly. There's no need, either, to wait for stock to be delivered to your custodian account.
- Hedging an existing portfolio is a popular use of CFDs. If you do not wish to liquidate your "real" stock portfolio, you can quickly and efficiently secure it by selling the appropriate CFDs for a short or long period, until you feel more confident about the market again.
This list is not a full list of the risks associated with dealing CFDs. It aims to address the most significant ones. You should not deal in derivatives unless you understand the nature of the contract you are entering into and the extent of your exposure to risk. You should also be satisfied that the contract is consistent with your investment objectives and financial circumstances.
CFDs are not suitable for everyone: whilst derivative instruments can be utilised for the management of risk, some investments are unsuitable for many investors. Different instruments involve different levels of exposure to risk, and in deciding whether to trade in such instruments you should be aware of the following:
- The power of leverage can work against you just as easily as it can work in your favour. Always remember to apply adequate risk management strategies in the event of adverse market conditions. Both losses and profits may accumulate up to 10 times as fast when using the full leveraging of CFDs.
- While we will always seek to provide tradable quotes for you, just as the real market can get literally untradable at times, we may not always be able to quote you a price or the spread between bid and ask prices may widen substantially at very short notice.
- Financing costs on long positions may be substantial, just as they would be if you undertake traditional margin trading. So you should always keep an eye on the costs associated particularly with maintaining a bought position for a longer period of time. Short positions incur no financing charge.
Please click here for the full risk warning.
What is margin trading?
When trading CFDs you do not have to pay the full value of the underlying shares you are buying or selling. Instead you will be asked to pay a deposit (margin), starting from 10% for UK CFDs This enables you to take an equivalent position of £10,000 in the underlying equities for a deposit of £1,000. Consequently a small percentage price change in the underlying equity can result in a large percentage gain or loss on the deposit or margin required to open the CFD.
Calculation:
If you wish to buy 3000 CFDs in Marks & Spencer at 353.75p
The CFD trade has a 10% margin requirement
3000 x 353.75p = £10,613 (total market exposure)
£10,613 x 10% = £1061.3
Therefore to open this CFD trade, you would be required to deposit £1061.3 as initial margin.
Why CFDs with E*TRADE?
The E*TRADE Professional V2 Advantage:
- FREE Level 2. This allows you to see the placing, filling and cancelling of orders on the LSE Order Book
- Fast, secure and efficient trading. You decide how to set up your account to trade in Sterling, Euros or US dollars
- Account summary. View information on your latest trade, market prices of your positions, margin requirements and total equity
- Live chat also available 8am - 5pm London time
