Even though the Securities & Exchange Commission (SEC), the controlling body of the financial markets in the US, doesn’t allow contracts for difference (CFDs) to be traded in that market, most other countries in the world who do allow CFDs have markets that let the trader take advantage of USA shares. It’s an ideal way to be involved in the market in that part of the world, as you do not need to hold a separate account.
Some of the major worldwide companies which are traded on the US markets include General Motors, General Electric, eBay Inc., Goldman Sachs Inc., Intel Corp., IBM, Motorola Inc., Yahoo Inc., and so on. While it’s true that some companies can be accessed from markets in other countries, CFDs allow you to get the full range of the USA share market conveniently from your home country.
Typically the contract size may be 1000 shares, which means each point would be US$10. Apart from the underlying financial security being a US share, the process for trading and profiting is exactly the same as for any other contract. The margin rate on shares is not as good as you can get on indices, and may typically be about 5% to 10%, or even higher. This means your leverage is not as good, but it is still much more effective than trading directly. You may also find that, while there is no commission on index CFDs, some brokers charge commission in and out on share CFDs.
As an example, say you believe that the shares of Apple Computer (AAPL) are going to increase in value. CFD providers typically can offer contracts on all the shares in the major US indices, so you should be able to find an Apple CFD relatively easily. Our CFD provider is quoting $284.48 — $284.56. You can buy one contract, which means you would be controlling $284,560 worth of Apple shares. At 10%, the initial margin for this contract is $28456. This is substantial amount, but in return you are benefiting from the share price movements of more than a quarter million dollars’ worth of Apple shares.
The commission charged might 0.1%, and obviously you should check this with your CFD provider. In this example, it would be $284.56. If you held a position overnight, you would be charged interest on the full value of the shares at a benchmark rate plus 2% or 3%.
The shares increased in value by $5.45, and your CFD provider quotes $289.93 — $290.01. In closing your position you get charged commission again, which in this case is $289.93. Your gross profit would be $289,930 – $284,560, a gain of $5370, giving a net profit of $4795.51, nearly 17% gain on your initial margin.