There are
many advantages to trading CFDs compared to investing
with traditional methods such brokering shares (equities)
or futures. CFD benefits include:
Profit on Rising or Falling Markets
It wasn’t too long ago that the only way
to invest or trade the markets was to buy and
hold, and hope that the market and underlying
value of the share or stock went up. There were
simply not very many choices for the average retail
investor or trader. With the introduction of new
and exciting trading products, including contracts
for difference, buying and selling can now be
performed as long as there is activity in the
market, which is almost anytime of the day or
night.
When you trade a CFD, it doesn’t matter
if the market is moving up or down because you
have the opportunity to profit from rising or
falling markets. For example, when shorting, the
goal would be to sell a position and try to buy
it back later at a lower price to earn a profit.
The same principle holds true for going long,
which is when you buy a position and then sell
it back later at a higher price. Of course, there
is equal risk that the market could move in the
opposite direction (see risk warning for more
details).
Wide Range of Trading Markets
More than six years ago, the retail contracts
for differences or CFD market was quite young
and the number of trading markets covered was
very limited. Since then, the market has become
increasingly popular for traders. In fact it continues
to grow significantly each year. Like many other
trading methods and derivatives, CFDs are becoming
increasing respected as an asset class among traders
and hedgers. One of the main reasons behind the
growth and maturity of CFDs is that traders have
so many options with this type of speculation,
including the ability to profit from rising or
falling market movements, anywhere in the world
and in any asset type, all from one account, active
traders find that retail CFD trading market is
beneficial for speculation.
CFDs typically allow you to trade any U.K. shares
with a market capitalization above £50M,
any U.S. and European shares with a market capitalization
above $500M or €500M, respectively, and all
major global indices, commodities, futures and
currencies. Certainly the diversity in trading
makes CFDs as appealing, if not more appealing,
than other active trading derivatives. With the
growth of the Internet, you also receive the benefit
of easily accessing widely available information
for most of the underlying markets you can trade.
Lower Capital Requirements - Leveraged
Trading
Contracts for difference offer traders flexibility
in a number of ways, from the types of trades
you can place to the actual size of your trades.
You can easily execute almost any size trade (order)
when you want to without having to put up the
large amounts of capital required with many other
trading markets or products. Because you do not
own the stock, share or contract, you do not have
to pay the full price of the share value.
A CFD is an example of “margined”
or “leveraged” trading. With a margined
trading product, you are only required to deposit
a percentage of the value (also called lodge or
lodging), instead of having to deposit the entire
value of your position size with your dealer.
This is also known as your initial margin (IM)
requirement.
Your initial margin may range from as little
as 1 percent for FX to 25 percent for less liquid
markets. Initial margins may also depend upon
the size of your trading account and the size
of your actual position. More liquid markets,
including the blue chips such as FTSE 100, are
stocks that require around 10 percent deposit.
Less liquid markets, or those that could be considered
more volatile and arguably riskier types of stocks,
may typically require higher margins, 15 to 25
percent, for example. (See our Market Information
Sheets for more details.).
One advantage of being able to trade on margin,
or leverage your trading capital, is that you
can trade the same size positions as you might
with a stock or shares broker, but you would have
more capital to trade more markets. This allows
you to diversify or free more of your discretionary
funds to use elsewhere. Of course, as you leverage
more of your capital, you are exposed to a higher
amount of risk.
For example, with 10 percent leverage, you would
only need to deposit £1,000 to buy a CFD
of £10,000 of shares. Therefore, a £500
profit would equate to a 5 percent return if you
purchased the shares outright, but amounts to
a return of 50 percent with a CFD. However, losses
are calculated in the same way, so traders should
be aware of the potential for magnified profits
and loss.
Competitive Commission and Financing
Rates
There are very low costs to get in and out of
the markets. Our standard commissions for most
individual equity CFDs are 15 basis points (i.e.,
0.15 percent of the share price times the size
of your position), while all other types of CFDs
offered are commission-free. Financing is only
applied to equity CFDS, FX CFDs and Index CFDs.
Trades opened and closed on the same day do not
accrue financing.
If you hold a long position (buy) you pay financing
charges (e.g. LIBOR + 3 percent), and if you hold
a short position (sell) you receive the financing
payments (LIBOR – 3 percent). Our rates
are based on the relevant overnight LIBOR, which
is published on the British Bankers’ Association
website (www.bba.org.uk).
Trading Flexibility
There are many flexible aspects of CFDs, from
the ease of buying or selling in any market condition
to the ability to place multiple types of trades
(order types). In fact, you are afforded a range
of orders that are specifically designed to assist
you in managing your risk and capturing your profits.
For example, if you placed a trade in the market
and wanted to get out at a certain price in anticipation
of capturing a profit, you could use a limit order
to sell or buy at a certain price.
Another type of flexible order, a stop order,
can be used to help limit your losses. A stop-loss
order is typically used to get out of your trade
when the market moves against you. For example,
if you place a trade in the market and want to
get out at a certain number of ticks if the market
moves in the opposite direction of what you speculated,
then you could use this type of order. A stop-loss
order is used to buy or sell a losing position
in the market. Click here to see more detailed
information on order types.
No delivery or trading expiration period
When you trade other markets, such as shares
or futures, your trades typically expire on a
certain date, sometimes as soon as one to two
days. With some types of contracts for differences,
however, you do not have to wait for a set expiry
date for your transaction. And, you can close
your position at any time to realize your profits
or losses. This applies to equity CFDs, forex
CFDs and index-based CFDs, other CFD markets are
based on future prices and have expiration dates.
However, you are still afforded the flexibility
to trade more often than traditional market hours
and avoid additional taxation.
Dividend adjustment credits on long positions
Dividend adjustments are credited to long positions
(buy trades) and debited from short positions
(sell trades) held after the close of business
on the day before the share is due to go ex-dividend.
The exact amount of the adjustment depends on
the dividend tax treatment of the relevant country.
For CFDs, an adjustment will be made to the customer's
account to reflect the effect of a bonus share
issue, scrip or rights issue affecting the underlying
share.
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