Options | Futures | CFD's | Spread Betting

CONTRACTS FOR DIFFERENCE

CFD's are similar to Futures Contracts in that they allow you to take positions on share prices without needing to buy and sell shares themselves, with the added advantage of no expiry date. A CFD's profit or loss is based on the difference between the contract's price when you buy it and the contract's price when you sell it. So, just like a futures contract on an index, when you close out, your profit or loss comes from the difference between the opening and closing share prices - hence, "contracts for difference".

CFDs are traded on margin, or put another way, just like a futures contract, where you don't buy the contract at normal market price - with a CFD, you don't have to buy the shares you're trading. Typically you will need to deposit 20-30% of the cost of the contract value with your broker in order to trade it. This is often referred to as the 'Initial Margin'.

FOR

1. Because purchasing a CFD means you are not actually buying the share you're trading, there is no liability for stamp duty.
2. CFD's also allow you to 'short' the market, in other words, you can sell the contract in order to profit from a falling share.
3. Although you're not actually buying the underlying share you're trading, you still receive dividends.

AGAINST

1. CFDs are high-risk investments - you can lose much more than your initial investment by trading them because your losses are leveraged as well as your profits. Companies offering CFD's will insist on adequate previous trading experience before letting you open a CFD trading account.
2. All CFD positions are 'marked to market' on a daily basis. This means that if you hold a position overnight, the profit or loss which has occurred within a day is either credited to or debited from your account. So, if your position has moved into profit, then the funds move into your account the same day. If your position has made a loss over the day then you the punter must cough up!