Pros & Cons of Dealing CFDs
Betting on Margin: CFDs allow you to hold much more value than you actually contribute. By using margins, traders are able to earn much higher return on investment percentages.
Traders never have to purchase the underlying asset: Because CFDs are simply contracts between a trader and a brokerage company, relating to the value of an underlying asset, the traders never have to have access to the actual exchange they are trading on.
No Stamp Duty: Since CFDs do not require traders to purchase any shares, stamp duty is not levied on trades.
Dividends are paid: If you hold a long CFD position on a company at the time of a dividend pay-out, your account will be credited for the amount of that dividend. CFDs are designed to mirror the value of their underlying asset, so you will receive all the benefits of actually owning the stock.
Interest is paid: If you have money tied up in a short position CFD, the brokerage firm will pay you interest on that money. If you had actually sold the stock instead of just purchasing the short CFD, you would be able to earn interest on the proceeds of the sale. Since you are not earning this interest, the CFD Broker will credit your account for the amount that you would have earned.
Ability to short shares: It is possible for traders to make money on shares that lose value if they predict the movement correctly. This is possible with many financial instruments, but CFDs make it very simple because they do not require the user to actually purchase any shares in order to sell them.
Plenty of Choice: CFDs offer a wide variety of assets for investors to trade. All major stocks will be listed, as well as major indexes, commodities, currencies and sectors. Traders will be able to create a diversified portfolio of CFDs.
| product | symbol | contract unit | contract size | instrument type | initial margin | tick size | contract month |
|---|---|---|---|---|---|---|---|
| EURUSD | EURUSD | Currency | 100000 | Currency | 2000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| GBPUSD | GBPUSD | Currency | 100000 | Currency | 1000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| AUDUSD | AUDUSD | Currency | 100000 | Exotic Currencies | 1000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| NZDUSD | NZDUSD | Currency | 100000 | Exotic Currencies | 1000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| USDCAD | USDCAD | Currency | 100000 | Currency | 1000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| USDCHF | USDCHF | Currency | 100000 | Currency | 2000 | 0.0001 | Spot - T+2 - Max. 360 Days |
Cons
Interest is Charged: CFD contracts are made on a margin. This means that the CFD broker is effectively giving the trader a loan. As with every loan, the trader must pay interest on the margin that the CFD Broker is providing. This is why CFDs are most useful on short term trades, if a CFD is held open overnight then interest will be charged to the trader.
No Voting Rights : Although CFDs mirror the value of their underlying assets, they do not mirror the ownership aspect of real shares. If ownership and voting reports are important for a trader, then CFD dealing would not be appropriate.
High Risks: When trading on margin, the potential for risk is much more than the investment that the trader is putting forward. Since only 10% of the investment is required and the rest is supplied on margin, it is possible for traders to lose ten times more than what they put down. Also, if a trader shorts a stock on a CFD the potential for loss is technically unlimited.
Guaranteed Stop Loss: Even though guaranteed stop losses are very useful to limit risk, they are often expensive, and have a limited life. It is important to mind the expiry date, and monitor the amount being spent on guaranteed stop loss orders, to ensure that they are beneficial.
Dividends are charged: When a short position is opened on a CFD, the trader's account will be charged if the company issues dividends. In order to mirror the actual value of the underlying asset, the dividends must be taken into account. If the trader had actually sold the stock, instead of using the CFD, he would not receive the income from the dividend; therefore this loss in income is represented in the trader's account.
Trading CFDs on Margin?
Instead of funding the entire cost of the total number of shares, a trader provides the CFD company with a deposit which is used as a 'margin' for the bet. This gives the trader access to a larger amount of shares than would be available to him if he were trading on the live markets.
The idea of trading on a margin is that the trader only pays a percentage of the quoted share price. A CFD company advertises a rate and so the trader is required to have a much smaller amount of money to start off with than if he was trading live in the share market.
This means that as little as 5% of the overall price of the shares is required as an initial payment on the contract. CFDs do not require the investor to purchase the underlying asset; therefore, the CFD trader can hold positions much greater than would be possible in any standard investment.
There is no fixed expiry date for CFD trading and so a trade is closed when the client feels it is right to collect their profits or to cut their losses if they have started to lose money.
Going Long and Shorting with CFDs
There are 2 types of trading with CFDs: going long and shorting.
A trader will open a long CFD position if he wants to buy shares which he expects to rise in value so that he can sell them at a later date and make a profit.
A trader will open a short CFD position if he wants to trade shares which he expects to fall in value so they can be bought at a cheaper price, with the difference between the opening and closing prices being counted as a profit. In this type of transaction, the trader is in effect 'borrowing' the shares from a third party to open the bet. So, when the trader finally buys the shares to fill the order at the lower price, the trader will be in profit.
Traders can choose to trade on indices or equity markets, the margins set by the CFD company are often different depending upon which financial instrument is selected.
When opening a CFD position, either long or short, there are a few charges a trader must take into consideration in addition to the initial margin required to start the trade.
CFDs are liable for Capital Gains Tax, charged on the income earned from closed contracts. However, this also means that they can benefit from losses as well, by writing the losses off against their gains. CFDs are not charged Stamp Duty, because there are no actual shares being bought or sold. Stamp duty taxes are 0.5% so traders can save substantial amounts of money by avoiding this charge.