What is a Contract for Difference?

Contract for Difference (CFD) is an agreement (made between two parties) to exchange, at the closing of the contract, the difference between the opening and closing prices, multiplied by the number of shares detailed in the contract. 

Every CFD has a contract value. It is the number of shares in the contract multiplied by the price of the underlying share. The Contract Value will change in line with the changes in the price of the underlying share. A CFD is valued daily at the close of business mid-price of the underlying share.

Where does the concept “CFD” originate from?

The CFD concept originated during the 1970’s in the UK, firstly within the wholesale sports markets, and then within the financial markets. Today CFD's contribute up to a whopping 40% of the UK FTSE exchange. 

Can I take or make delivery of a stock by trading an Equity CFD?

No. A CFD is a financial instrument linked to the underlying share price. You will not acquire any rights or incur any obligations relating to the underlying share.

What Margin is required for CFD trading?

Your initial margin may range from as little as 1 percent for FX to 25 percent for less liquid markets. Initial margins may also depend upon the size of your trading account and the size of your actual position. More liquid markets, including the blue chips such as FTSE 100, are stocks that require around 10 percent deposit. Less liquid markets, or those that could be considered more volatile and arguably riskier types of stocks, may typically require higher margins, 15 to 25 percent, for example.

Will I have to pay Stamp Duty when buying an Equity CFD?

No. As no purchase of the underlying shares is involved no Stamp Duty (currently 0.5% of the Contract Value) is payable.

How often can I trade?

Provided that an account is sufficiently funded it is permissible to trade as frequently as desired. Trading will normally only be possible during the hours that the relevant stock market is open. 

Can I buy or sell a CFD?

Yes. You can buy (go ‘long’) a CFD and will make a profit if the value of the CFD increases. If you sell (go ‘short’) a CFD, you will make a profit if the value of the CFD decreases. 

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