Such is the versatility of CFDs that they are now also available on a wide range of other instruments, with one of the most popular areas being the equity indices. Traders can use these contracts to speculate directly on the performance of major markets such as the FTSE 100; the Dow, S&P and the NASDAQ in the US; the DAX, CAC and the MIB in Europe; as well as other important indices such as the Nikkei and the Hang Seng.
In fact, CMC Markets have just introduced contracts on the Scandinavian equity indexes and plans CFDs for Germany’s MDax and TecDax indices in April. But that is only the beginning; CFDs exist for all the major currency cross rates, as well as the bond and commodities markets. Oil, gas, gold, silver, platinum, US grains, softs and meats; you name it you can trade it with CFDs.
As with the individual equities, stock index CFD trades are always made in the base currency of the relevant market and the financing adjustment will likewise be based on the associated rate of interest.
Some equity index CFD providers choose to mirror the relevant futures contract specifications. When dealing the standard contracts this can make for some pretty substantial minimum exposures. For instance, the FTSE 100 index has a value of £10 per point giving one CFD an exposure in excess of £50,000 at current levels.
Fortunately for smaller traders there is usually the option of using one of the mini contracts instead. The FTSE mini for example has a value of just £2 per index point and an exposure of around £10,000. There may even be the scope to deal in fractions of a contract. Other CFD providers simply set a value per index point of one unit of the base currency (£1, $1 etc.) and leave it to the individual to scale the trade to his own requirements.
Margin is usually defined as a notional trading requirement or NTR, which stipulates a percentage value of the exposure and as such will vary slightly depending on the actual level of the index. A holding of five FTSE 100 CFDs each valued at £1 per index point with the index trading at 5,000 would equate to an exposure of £25,000 to the market which, given an NTR of 7.5%, would require margin funds of just £1,875. Similarly selling two Wall Street CFDs, which are based on the Dow Jones index, at $1 per point with the index standing at 10,750 would give an exposure of $21,500 and would be possible with a margin deposit of 7.5% or $1,612.50.
Sector Index CFDs
Complementing the individual equity and broad market index products is a range of sector index CFDs. These are similar in principle to the equity market contracts but give exposure to a specific industry. They are useful for traders who have a view on a particular area of the market but who want to avoid any stock-specific risk. Equally they can be used to back one sector over another – say banks over oils – by combining a long and short position.
The majority of providers quote UK sector CFDs based on the FTSE 350 universe of shares, though it is possible to find quotes on some sectors of certain overseas markets such as Germany and the US. With the UK oil and gas sector CFD quoted at 6070/6095 a trader who was bullish – perhaps anticipating an increase in the price of oil – could buy five CFDs at the offer price of 6095 for an exposure of £30,475. The margin for this would be in the region of 7.5% of the value of the contract or £2,286. If the sector increases 1% to 6130/6155, the position could be closed by selling at the bid of 6130 to generate a profit of 35 points or £175. Market and sector index CFDs are generally traded commission-free with the providers making their money by adding a fixed spread to their quotes. The most competitive tend to charge three to six points on the most common indices such as the FTSE 100 and the NASDAQ 100 though some may quote double this.
Spreads may be an extra point or two higher if traded outside normal market hours. The bid-offer spread on UK sector indices tends to be around 0.4%. There is also some variation in how the indices are actually priced. The easiest to understand are those that are based on the level of the index itself. Some however take their quotes from the futures price as adjusted for fair value.
CFDs: Commodities Trading
One of the beauties of CFDs is that they are now available on almost all of the major asset classes. For instance, one of the dominant themes of last year was the inexorable increase in commodity prices and unsurprisingly this created an upsurge in interest in commodity CFDs. A great deal of attention was focused on the gold, silver and platinum markets, but equally the oil price never strayed far from the headlines. CFD traders could access all of these diverse specialist areas through a single account.
Someone who was bullish on the price of gold could for example take a long position in a spot gold CFD. With the contract quoted at $436.6/437.1 the trader could buy four CFDs at 437.1. With no commission to pay the only cost is the spread and the overnight financing charge. If the price increases to 442.5/443 over the next couple of weeks the trader could decide to take his profit by selling four contracts at 442.5. This would make the difference between the opening and closing level $5.4 per ounce. For four contracts each equivalent to 100 ounces this equates to a profit of $2,160 before interest.
Fixed income and Currencies
CFDs can also be used to participate in the fixed-income and currency markets. All the main LIFFE and Eurex interest rate contracts, including short sterling, gilt and Eurobond are available, as are the US Treasury bonds and notes and the major currency pairs. A CFD account enables traders to access these instruments with smaller contract sizes and lower margin requirements than the equivalent futures contracts.