- What are CFDs?
A contract for difference (CFD) is a derivative product which allows you to trade the global financial markets by speculating on rising and falling price movements.
If the price moves in the direction you predicted, you will make a profit. However, if the price moves against you, you will make a loss.
Traditionally when trading CFDs, any losses you make can exceed your deposits. However, with a CMC Start account, you have negative balance protection, which means you can’t lose more than the funds in your account. Invest only what you can afford to lose.
CFD trading works differently to traditional share trading, and offers several benefits.
|CFD trading||Share trading|
|Free from stamp duty*||Yes||No|
|Access to global markets||Yes||Yes|
|Go long (buy) or go short (sell)||Yes||No|
|Own product outright||No||Yes|
With CFD trading you don’t own the physical asset that you trade (such as an actual share or commodity), as you would with share trading. Instead you speculate on the price movement of a financial instrument, like EUR/USD, UK 100, Gold or Apple.
You can place a buy or sell trade on popular global instruments, which means you can profit from both rising and falling markets.
A CFD is a leveraged product, which allows you to gain a large exposure with a relatively small outlay (known as margin). Leverage trading is not necessarily for everyone and you should ensure you understand the risks before placing any trades.
One of the main attractions of CFD trading is that you can trade using margin, which means you only need to deposit a small percentage of the full value of the trade in order to open a position. While trading on margin allows you to magnify your profits, losses will also be magnified as they are based on the full value of the trade.
One of the main features of a CMC Start account is that you have negative balance protection, so even though your losses will be magnified, you can never lose more than the funds in your account. Invest only what you can afford to lose.
Say you want to buy 1,000 CFDs (the equivalent of 1,000 shares)
Company A buy share price = £2
Company A margin rate = 3%
(Number of CFDs x share price) x margin rate = margin requirement
(1,000 x £2) x 3% = £60
So your initial investment needed to open this trade would be £60 (remember that the full value of the trade is £2,000 (1,000 x £2), and this is the figure that your profits and losses will be calculated from).
To buy 1,000 of Company A’s shares outright, you would have to pay the full value of £2000.
Spread: when trading CFDs you have to pay the spread (the difference between the buy and the sell price). You enter a buy trade using the buy price quoted, and exit using the sell price. CMC Start offers competitive spreads.
Holding costs: at the end of each trading day (5pm New York time), any open trades may be subject to a charge called a holding cost. This cost can be positive or negative depending on the direction of your position and the applicable holding rate.
Guaranteed stop-loss orders: for a premium, guaranteed stop-loss orders ensure that you are closed out of a trade at the price you specify, regardless of market volatility or gapping.
Rollovers: commodities and treasuries which are offered as forward contracts have a fixed expiration or settlement date. You are able to automatically rollover forward positions to keep a trade open beyond its expiry date, and there will usually be small charge for this.
CMC Start has 0% commissions
A buy trade:
Company A shares are trading at 0.98 / 1.00
Sell price = £0.98
Buy price = £1
Spread = 2
You think the company’s share price is going to go up, so you decide to buy 10,000 CFDs at £1.
Company A margin rate = 3%. So you only need to deposit 3% of the total value of the trade.
(10,000 x £1.00) x 3% = £300
You will pay £300 to open this trade. Remember that the full value of the trade will be worth £10,000, and your profit or loss will be based on this figure.
Your prediction was correct and the price rises to £1.10 / £1.12.
You decide to close your buy trade at the sell price of 110.
The price has moved £0.10 in your favour (from the original buy price of £1 to the current sell price of £1.10). You bought 10,000 CFDs.
10,000 x £0.10 gives you a profit of £1,000.
Unfortunately your prediction was wrong and the price of company A drops to 0.93 / 0.95.
To limit your losses, you decide to close your buy trade at the sell price of 0.93.
The price has moved £0.07 against you (from the of original buy price of £1 to the current sell price of £0.93). You bought 10,000 CFDs.
10,000 x £0.07 gives you a loss of £700.
Remember that with a CFD Start account, you have negative balance protection, which means you can never lose more money than you have in your account.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK