Q:Show me some examples…A: CFDs offer much more than equity derivatives, as you can also get CFDs on indices and forex pairs – so you could, for example, buy the FTSE, or sell the pound, using CFDs.
So this is how it works: Suppose you wanted to buy shares that currently stand at £3.00, you could buy 20,000 shares for £60,000 (plus commissions) or you could buy a CFD. If we assume that this is a blue-chip stock (i.e. highly liquid) your broker is prepared to offer you a contracts for difference at 10% margin, then you could get exposure to the same 20,000 shares for a margin outlay of only £6,000. If the shares then rise in price, say by 10p, you could close your CFD position for a gain of around £2,000 (10p x 20,000), less broker commissions or other costs.
Share CFD Example
Vodafone shares are trading 140 – 140.5p in the market, so a CFD issuer offers a CFD with the same pricing. If you think the price will rise, you can buy a CFD to trade 10,000 shares at 140.5p. The total value of the contract would be £14,050 but you only need 10 per cent initial margin of £1,405. If Vodafone shares rise to 145 – 145.5p, you can choose to close the CFD position by selling 10,000 Vodafone CFDs at 145p. You make 145p-140.5p=4.5p x 10,000 =£450, minus two commissions.
Index CFD Example
The FTSE 100 is trading at 5204 so a CFD issuer offers a CFD based on this price, by quoting a spread of 5201 – 5207. The price of the CFD is set in line with the spread at £5,207. If you think the index will rise, you buy as many CFDs as needed to give you the exposure you want – say 2 CFDs, giving a trade value of £10,414, but putting down 1 per cent initial margin of £104. If the FTSE 100 rises to 5255, you can close the poition and make 5252-5207=£45×2=£90, with commission in the spread.
Currency Trade Example
Crude oil is trading at $135 a barrel so a CFD issuer offers a CFD by adding a spread of $134.96-$135.04, with one CFD providing exposure to 100 barrels. If you think the price will fall, you sell as many CFDs as needed to give you the exposure you want – say 1 CFD, giving a trade value of 1 x 100 x $134.96 = $13,496 but putting down 5 per cent initial margin of £675. If the price falls to $130, you can close the poition and make $134.96-$130.04=$4.92×100=$492, with commission in the spread.
(551p – 501p) x 2,000 = £1,000.
(451p – 501p) x 2,000 = £-1,000.
(6000 – 5900) x 5 = €500.
(6000 – 6100) x 5 = €-500.
($81.05 – $80.05) x 8 = $800.
($79.05 – $80.05) x 8 = $-800.
* CFD trades are executed in the currency of the instrument you are dealing in. As a result changes in currency exchange rates will affect your profit/loss on a trade
Q:What markets are available to trade?A: CFDs are available on a vast range of different assets although the types of contracts for differences that can be traded will vary from provider to provider. This means that you can trade CFDs on anything ranging from local equity CFDs (i.e. individual stocks) to overseas shares, stock market indices and sectors, currency pairs and commodities on the same trading account.
In fact CFDs are now available in all shares in the FTSE 100, FTSE 250, and many popular UK small cap shares and some providers will even go down to companies with a market cap of around £10 million. Most issuers also offer CFDs on larger US, European, and international shares. This means that you can trade share CFDs on Google, Apple, Amazon, Microsoft, Yahoo, Honda, Toyota, BMW, BP and other sizable companies that aren’t available on the London Stock Exchange.
David Jones, a market strategist, says ‘Whether a CFD can be created will largely be a function of liquidity, so CFDs are available on pretty much any financial market you can think of.’
CFDs are also available on all major shares indices, such as the FTSE 100 (UK), S&P 500 (USA), Dow Jones (USA), German Dax, French CAC 40 and other European indices, plus the Japanese Nikkei and other Asian indices. It is also generally possible to trade the major international stocks using cfds. In addition, you can also trade CFDs over changes in the relative values of currencies, such as the British Pound against the US dollar, or the US dollar against the euro as well as commodities, two of the most popular being gold and oil.
Points to note -:
- Individual equities are the most commonly traded types of CFDs. Some CFD providers also quote small-caps, although the coverage varies from broker to broker and market to market.
- Forex CFDs are also widely available. Unlike a regular forex trade, the position you take with your CFD is not subject to daily rollovers. The position remains open at the price you trade at until the position is closed and any profit/loss is immediately credited/debited to your account.
- Stock index CFDs enable you to speculate on the price movements of the stock market. With this type of CFD, however, you are trading a market segment (usually between 30 to 500 stocks), not just a share.
- Unlike some spread betting firms, issuers also provide CFDs on stock market sectors within international markets, such as banks, telecoms and household goods.
- Commodity CFDs are available on metals such gold, silver, platinum, oil and soft commodities, such as coffee and sugar and even exotic markets like pork bellies!
- ETFs (Exchange Traded Funds) are also offered as CFDs.
- Government bond CFDs are offered on UK gilts, US Treasury Bills and other issues.
- Currency CFDs are based on currency futures or indices of the exchange rates between various currencies and others.