SHORT-TERM TRADING

The ability to trade on a margined basis combined with stamp duty-free status (disclaimer/risk warning) make the CFD an ideal instrument for short-term trading.

SHORTING STRATEGIES

CFDs are ideal when you want to profit from an expected fall in share values or a specific company decline.
In the UK, taking a ‘short’ (bearish) position in physical shares can be both cumbersome and expensive. By contrast, a short CFD can be held indefinitely without further costs, in fact, you actually receive interest for as long as you run the position. You open a position by ‘selling’ a CFD in the share you are expecting to fall and later close your position by buying it back, hopefully at a lower price.

PAIRS TRADING

To trade two correlated share against another. If you believe that one company is undervalued compared to another company (for example, Lloyds against Barclays) you can use CFDs to go long on the cheaper stock whilst going short on the more expensive stock. While there are many different pairs trading strategies, some of the more common ones include:

• Simillar instruments which may move in the same direction but one may be expected to move more than the other may be paired. For example in energy, a junior producer may be more volatile than a senior producer but both may react the same way to commodity price moves.
• Instruments where a win for one often represents a loss for the other may be paired. An example of this relationship may be found in Boeing versus Airbus.
• Investor may look to take advantage of long term relationships which may diverge for short periods. For example, suppose the S&P/TSX Composite Index and the S&P/TSX 60 Index generally trend in the same direction and move up and down similarly. Suppose one day the Composite rallies 4% and the 60 only advances 1%. A pairs trader may look at this and expect a move to return to the long-term relationship.
• Attempt to isolate varying trends between industries such as raw material suppliers and those that use its products. Examples include energy producers versus transportation companies.

USING STOCK AS COLLATERAL AND TAX EFFICIENT TRADING

You can also transfer your existing portfolio into a custody account, allowing you to use its value instead of, or alongside your cash. A "haircut" will be applied to the value of your stock to allow for the possibility of price movements.

If you have a holding of physical shares you can sell CFDs against this without crystallising a potentially taxable capital gain. This enables you to control the time at which you realise capital gains or losses and may reduce your tax liability.

MARKET HEDGES

You can also use a CFD to protect your long-term holdings against variable market conditions. You may wish to hedge physical positions that have bearish short-term prospects, since an outright sale of shares may be costly, i.e. incur Capital Gains Tax liability, dealing charges, etc. If the ‘hedge’ is correct, you will be able to buy your short CFD position at a lower level and the profit achieved on your CFD will offset the paper loss on your physical shareholding.

RISK WARNING

CFDs carry a high level of risk to your capital and you should only deal with money you can afford to lose. The value of investments can fall as well as rise and you may lose significantly more than your initial margin payment. This online guide should be read along with the application pack and brochure you receive when you apply for CFD dealing with Quantaur Capital Ltd. We do not recommend that CFD dealing as a suitable investment tool for all types of investor. We recommend that you consult an independent financial adviser if you are uncertain whether CFDs are the right investment vehicle for you. You must understand and accept the terms and conditions contained in the application pack, and sign a risk warning notice before you begin to deal in CFDs.