CFD Trader
What is a CFD? A CFD (short for contract for difference) is an agreement between two parties to settle, at the close of the contract, the difference between the opening and closing prices of the contract, multiplied by the number of underlying shares specified in the contract.
Cfds are similar to ordinary shares but with some key advantages over physical share dealing. A Cfd trader is able to take long or short positions. Whereas you cannot short physical shares if you dont own the stock. You would have to borrow the shares in order to go short. Unlike futures contracts cfds have no fixed expiry date or contract size.
Cfd Trades are conducted on a leveraged basis with margins. There is an initial Margin charge, Which is normally between 5% and 30%), and then Variation margin which is marked to market. This is another key advantage to being a cfd trader over ordinary share dealing. With a Cfd trade you can buy or sell many more as you only pay a percentage of the value of the deal instead of the full amount.
Another advantage of being a cfd trader over ordinary share dealing is that you dont pay stamp duty (saving 0.5% compared to a traditional share purchase).
The prices quoted by many CFD brokers is the same as the underlying market price. You will usually be charged a commission on the trade value. The total value of the transaction is simply the number of Cfds bought or sold multiplied by the market price.
Risks of being a cfd trader The gearing nature of margin trading markets means that both profits and losses can be magnified and unless you place a stop loss you could incur very large losses if your position moves against you. It is less suited to the long term investor, if you hold a Cfd open over a long period of time the costs associated increase and it may be more beneficial to have bought the underlying asset. You have no rights as an investor, including no voting rights.