Contract For Difference or CFD is an agreement between the investor and the seller or broker to pay the difference between opening and closing value of the Trade, when the contract is closed. The main advantage of CFDs over shares is that they can be sold or bought back at any time at the value set by the stock market in cash.
CFD trading is very similar to normal share dealing in two respects:
- CFDs are traded in cash like shares.
- The commission paid is calculated as a percentage of the value of the transaction.
You can buy or sell at the quoted price with CFDs to profit from rising or falling markets.
|
| |
Why Trade CFDs?
CFDs are a versatile trading method, giving you access to share price movements without having to own the underlying shares. With William Albert Securities Limited you can also trade Forex, Stock indices, Commodities and many other markets on margin. |
| |
Benefits of CFD trading
- Traded easily for long or short
- No stamp duty and no physical purchase required
- Pay only a fraction of the full contract value
- No fixed time period
- Immediate dealing
CFDs are a leveraged product and can result in losses exceeding clients’ initial deposit. CFDs may not be suitable for everyone, so please ensure that you fully understand the risks involved.
|
| |
CFD EXAMPLES (For Shares)
Long Barclays Example
The investor holds the view that share price of Barclays will go up, expecting the stock to rise over the next week. The trader buys 5,000 shares of Barclays at £5.40 using a CFD. The trade was done on a Monday and the shares sold on Tuesday of that same week at £5.70.
|
| CFD – LONG POSITION |
| Buy 5,000 BARCLAYS shares using CFDs at £5.40 |
(£27,000) |
| Commission at 0.50% (to open) |
(£135.00) |
| Financing (2 days at £5.73 per day) |
(£11.46) |
| 5,000 BARCLAYS shares sold at £5.70 |
£28,500 |
| Commission at 0.50% (to close) |
(£142.50) |
| TOTAL PROFIT |
£1211.04 |
|
Holding a Long CFD position open overnight the investor will incur a financing charge based on sterling LIBOR and the closing value of the shares held. Here, the financing rate is LIBOR + 3%. LIBOR is 4.75% and the closing price of Barclays on the day of the opening trade is £5.52
Therefore the financing charge = 5,000 x £5.40 x 7.75% = £2,092.50 per year/365days = £5.73 per day
Short Barclays Example
The investor holds the view that share price of Barclays will come down, expecting the stock to fall over the next week. The trader sells short 5,000 shares of Barclays at £5.40 using a CFD. The trade was done on a Monday and the shares are bought back to close the trade on Wednesday of that same week at £5.10.
|
| CFD - SHORT POSITION |
| Sell short 5,000 BARCLAYS shares using CFDs at £5.40 |
£27,000 |
| Commission at 0.50% (to open) |
(£137.50) |
| Financing (2 days at £1.66 per day) |
£3.32 |
| 5,000 BARCLAYS shares bought back at £5.10 |
(£25,500) |
| Commission at 0.50% (to close) |
(£127.50) |
| TOTAL PROFIT |
£1238.32 |
|
Holding a Short CFD position open overnight the investor receives the financing based on sterling LIBOR and the closing value of the shares.
Here, the financing rate is LIBOR – 2.5%. LIBOR is 4.75% and the closing price of Barclays on the day of the opening trade is £5.40.
Therefore the financing rebate = 5,000 x 5.40 x 2.25% (4.75% - 2.5%) = £607.50 per year/365 days = £1.66 per day.
Please note: The above examples are purely hypothetical and are for illustration purpose only. Interest rates are subject to change any time.
|
