CFD trading explained
Put simply, CFD trading lets you speculate on the price movement of a whole host of financial markets such as indices, shares, currencies, commodities and bonds, regardless of whether prices are rising or falling. Because you are speculating on price movement rather than owning the underlying instrument, you will not pay UK Stamp Duty on any profits.
CFD (Contract For Difference)
The term CFD stands for Contract For Difference. This is a contract to exchange the difference in value of a financial instrument (the underlying market) between the time at which the contract is opened and the time it is closed
Why is CFD trading popular with investors?
CFDs are a popular way for investors to actively trade financial markets. This is because CFDs are:
- Tax efficient – You are not required to pay UK Stamp Duty
- Flexible – you can trade on rising as well as falling markets
- Trade on falling markets (going short) as well as rising markets (going long)
- Leveraged products -Use a small amount of money to control a much larger value position
- Hedging tools – You can use CFDs to offset any potential loss in value of your physical investments by going short
How much does it cost to trade CFDs?
It depends on the market you choose. Generally you only pay a commission charge for share CFDs, or a spread (the difference between the buy and sell prices) for all other markets. There is a small charge to fund positions overnight, a small premium for guaranteed stops, and there may be other fees for extras.
How Trading CFD works ?
Although originally devised for equity trading, CFDs are also used to trade indices, forex, energies, metals, commodities and more. Our CFD service covers a wide range of asset classes matching the scope of our spread betting service. As with our equity markets, the charge for all our non-equity contracts is built into the dealing spread.
Say you want to buy 100 shares in OIL. You could buy these shares through a stock broker, paying the full value of the shares (100 x the current market offer price of OIl) plus a commission to the stockbroker.
Alternatively, you could buy 100 CFDs in oil at the live market price. This would give you exactly the same exposure, but to open this contract you would only have to supply a margin deposit to cover any potential downside, and pay a small commission.
Selling shares through a CFD provider is easy. You just open your contract to go short rather than long, at our bid price. For this reason CFDs are often used by clients who want to hedge an existing investment portfolio.
Which CFD markets can I trade on?
Trading CFD offers a choice of over 25,000 CFD markets, including:
- Indices such as the UK 100, Wall St and Germany 30
- FX such as GBP/USD, GBP/EUR and JPY/USD currency pairs
- Shares such as Rio Tinto, Amazon and General Electric
- Commodities such as oil, gold and cocoa
- Other markets including bonds, interest rates and options