| |
Contracts for Difference (CFDs) are an invaluable tool for traders and investors, providing flexibility and maximising the use of your capital. In a practical sense, a CFD is a contract on an underlying asset (for example, a share, commodity or currency) to pay or receive the difference between the opening price and the closing price of the asset.
CFDs : the main benefits:
- No stamp duty payable
- Make money if an asset price rises or falls (i.e. go long or short)
- Less initial outlay- Control an asset for as little as 1% margin
- No contract expiry
- Deal at market prices- no extra spread
A Practical Example
In this example, an investor wishes to control £10,000 worth of Anglo-American shares, currently priced at £10 each. The investor believes Anglo-American’s share price is likely to rise.
Accendo Markets offers Anglo-American on a 5% margin, so the investor only needs to invest £500 (£10,000 x 5%) to open this position using CFDs.
| Opening Trade |
| |
CFD |
Standard Shares |
| Initial Outlay |
£500 |
£10,000 |
| Total Value of Shares |
£10,000 |
£10,000 |
| Number of Shares |
1,000 |
1,000 |
| |
|
|
| Stamp Duty (0.5%) |
0 |
£50 |
| Commission (0.5%) |
£50 |
£50 |
After a ten day holding period, the Anglo-American share price has risen to £11. The investor decides to close the position and realise a profit of £1 per share.
| Closing Trade |
| |
CFD |
Standard Shares |
| Overnight Financing Costs |
£20.55 |
£0 |
| Commission |
£55 |
£55 |
| |
|
|
| Total Costs |
£125.55 |
£155.00 |
| Closing Value of Shares |
£11,000 |
£11,000 |
| |
|
|
| Total Profit |
£874.45 |
£845.00 |
| % Return on initial outlay |
174.89% |
8.45% |
An Alternative Practical Example
In this example, an investor wishes to control £10,000 worth of Anglo-American shares, currently priced at £10 each. The investor believes Anglo-American’s share price is likely to rise.
Accendo Markets offers Anglo-American on a 5% margin, so the investor only needs to invest £500 (£10,000 x 5%) to open this position using CFDs.
Opening Trade |
|
CFD |
Standard Shares |
Initial Outlay
Total Value of Shares
Number of Shares
Stamp Duty (0.5%)
Commission (0.5%) |
£500
£10,000
1,000
0
£50 |
£10,000
£10,000
1,000
£50
£50 |
After a ten day holding period, the Anglo-American share price has risen to £11. The investor decides to close the position and realise a profit of £1 per share.
Closing Trade (Profit) |
|
CFD |
Standard Shares |
Overnight Financing Costs*
Commission
Total Costs
Closing Value of Shares
Total Profit
% Return on initial outlay |
£20.55
£55
£125.55
£11,000
£874.45
174.89% |
£0
£55
£155.00
£11,000
£845.00
8.45% |
After a ten day holding period, the Anglo-American share price has fallen to £9. The investor decides to close the position and realise a loss. However, a stop-loss was placed on the position at £9.50, reducing the loss.
Closing Trade (Loss) |
|
CFD |
Standard Shares |
Overnight Financing Costs*
Commission
Total Costs
Closing Value of Shares
Total Loss |
£20.55
£55
£120.55
£9,500
£620.55 |
£0
£55
£150.00
£9,500
£650.00 |
*Overnight financing is based on LIBOR, and is therefore variable
A Practical Example: Shorting
An investor believes the price of British Telecom (BT) is likely to fall, and therefore wishes to short £10,000 worth of BT shares, currently priced at £1 each. Shorting an asset is a ‘mirror image’ of buying it.
The investor is unable to short the BT shares with a traditional stockbroker, and is therefore unable to capitalise from a price drop.
| Opening Trade |
| |
CFD |
Standard Shares |
| Initial Outlay |
£500 |
- |
| Total Value of Shares |
£10,000 |
- |
| Number of Shares |
£10,000 |
- |
| |
|
|
| Stamp Duty (0.5%) |
0 |
- |
| Commission (0.5%) |
£50 |
- |
As expected, the BT share price falls to 90p ten days after the position is opened. The investor decides to close the position and makes a profit.
| Closing Trade |
| |
CFD |
Standard Shares |
| Overnight Financing Credit |
£20.55 |
- |
| Commission |
£50 |
- |
| |
|
|
| Total Costs |
£79.45 |
- |
| Closing Value of Shares |
£9,000 |
- |
| |
|
|
| Total Profit |
£925.55 |
- |
| |
|
|
| % Return on initial outlay |
185.11% |
- |
Please note that overnight financing is based on LIBOR, and is therefore variable. It may be the case, in times of low interest rates, that you pay a small amount of interest on short positions overnight. For more information, please contact us.
Risks and Leverage factor
See our ‘trade sense’ CFD guide for more information.
Dividends
Shorting
Overnight Financing
Stamp Duty
Tax
Spread
LIBOR
|
|
