HOW CFDS WORK

If we consider a UK equity CFD, then each Contract for Difference corresponds to an individual company share, such as BP, Marks & Spencer or Barclays. It is quoted in exactly the same way, and its movement mirrors the ups and downs of the underlying share. As with shares, you can buy or sell a CFD whenever you wish and there is no time limit. You can choose to hold a CFD position for months, weeks or merely a few hours. Unlike shares, you cannot take delivery of a CFD. Instead, you settle the difference between the opening and closing prices, and the difference is your profit or loss.

CFDs are not traded on a stock exchange, but are transacted directly with a London based specialist market maker regulated by the FSA (Financial Services Authority). You will have no shareholder voting rights unless specifically negotiated. By the same token, you will not pay stamp duty (0.5% under current UK legislation) or any safekeeping or custody fees.

Warning: Trading Contracts for Differences (CFDs), futures and spread betting carries a high level of risk to your capital, and is not suitable for all investors. Only speculate with money you can afford to lose. Trading or placing any bets can result in consumers incurring liabilities in excess of their initial stake. Please ensure you fully understand the risks, and seek independant advice if necessary.

 

MARGIN TRADING

Trading CFDs is sometimes known as “margin trading” since they are dealt on a margin basis, and you secure the transaction by paying a deposit, also known as a Notional Trading Requirement (NTR), of around 10% of the contract value. You must also be able to maintain this required margin as of close of market daily, which may involve topping up the deposit if the level of exposure increases (by the movements in variation margin – see below) during the period of the contract (this top-up being known as “margin call”).

The benefits of margin trading are that if you make a profit, you haven’t had to make a full outlay of collateral, you are able to take a much larger position than you would normally be able to, and there is the potential of significantly greater profits than traditional share dealing (also known as ‘gearing’). It should be noted that the level of gearing depends on your particular attitude to risk. Quantaur will provide levels of gearing as per your appetite for risk (which you can discuss in more detail with your adviser).

However, you should be aware that gearing also means that the potential for losses is similarly increased. Because of this, you should read this guide and the application pack carefully before dealing in CFDs.

Deposit Margin

Variation Margin

Deposit margin, sometimes referred to as initial margin, is paid when a trade is opened and returned in full when the trade is closed. For most CFD trades, both long and short positions the initial margin requirement is between 10%-20%. As a general rule of thumb, the larger the stock the smaller the initial margin requirement. So if you buy 10,000 shares of ABC stock at £1.00 using CFDs you'll have to deposit a cash sum of between £1,000 and £2,000 This margin must be maintained in full on a daily basis until closure of the position.

All margined products use some sort of variation margin where profits and losses are 'marked to market' at the close of business everyday. Think of variation margin as the daily profit or loss which is credited or debited from your account (and potentially from your NDR). If you bought a stock using CFDs at £1.00 and it closed that day at £1.05 you would be credited with 5p of profit (x the number of shares) at the close of business. The 5p profit is variation margin, or positive variation margin if the following day the shares closed down 5p at £1.00 you would have lost 5p. Remember, although you bought the shares at £1.00 you were paid 5p profit yesterday when they rose by that amount. So although you bought the shares at £1.00 the variation margin is set via the closing price of one day to the next. In this example at the close of business you'll have to pay 5p in negative variation margin

 

DIVIDENDS AND INTEREST

A synthetic dividend adjustment is credited to long positions and debited from short positions held at the close of business on the day before the ex-dividend date. Payment is credited or debited to your account on the ex-dividend date.

Interest is calculated on CFD positions held overnight and is credited or debited on the next trading day. If you are holding a long CFD position, you pay the financing (akin to borrowing money to purchase the underlying equity); and if you are holding a short CFD position, you will receive the financing. If you open and close a position within the same day, you neither pay nor receive financing.