How it works

CFD trading is very similar to normal share dealing in two respects. You deal at the cash price (market price) of the share, and pay a commission which is calculated as a percentage of the value of the transaction.

When you open a position, however, you do not have to pay for the full value of the shares. Instead you put up a deposit, e.g. 5%, which means you can trade up to 20 times your initial capital.

When you close your position, the difference between your opening contract value and your closing contract value is realised. So just as with buying shares or trading futures, the degree to which you are correct in your CFD trading affects how much you make or lose.

One key benefit of trading CFDs is that you do not incur any UK Stamp Duty, as you are not making a physical purchase. Please note that tax laws may change and are subject to individual circumstances.

Leveraged products like CFDs can help you make the most effective use of your investment capital, but it is important to appreciate that the amount you could lose relative to your initial investment is greater for geared products than for non-geared products.

Go long or short

With CFDs you can buy or sell at the quoted price, to profit from rising or falling markets. Other methods of shorting shares are often inconvenient and expensive. See examples.

Wide access

CFDs can be used to trade an extremely wide range of financial products and this means they offer a way to easily start dealing across a large cross-section of the market.

For example, if you have an interest in shares, the level of Wall Street, the price of oil and the exchange rate of the Dollar against the Euro, you can deal all of these markets with one CFD provider on one account.

Mechanics of a CFD

A CFD is an undated contract that captures every aspect of share trading, except that you don't have to put up the full contract value.

Most CFDs have no fixed expiry date, giving you the freedom to close your position when you choose. You open and close your position at the actual market price, and while your position remains open your account is debited or credited to reflect interest and dividend adjustments.

Some other market, such as Gold or Oil, are Expiry Transactions. These have a fixed expiry date (specific to each market) and if you have not closed such a position by its expiry date, it will automatically close.

Interest and dividend adjustments

CFDs are designed to reflect as closely as possible an actual share trade. So while your position is open you pay or receive daily interest adjustments depending on whether you have a long or a short position.

Long positions

Your account is debited to reflect interest adjustments and credited to reflect any dividends. This mirrors the effect of buying shares in the normal way, where you no longer earn interest on the funds used to buy the shares, but receive dividends instead.

Short positions

Your account is debited to reflect any dividends and credited with interest adjustments, unless LIBOR is less than 2.5%, in which case short positions will incur a debit. This mirrors the effect of selling shares, where you earn interest on the proceeds of the sale, but cease to receive dividends.

The interest rates are highly competitive, based on the inter-bank offered rate for the currency that the trade is denominated in, plus/minus 2.5%. If you choose to go short, you may also be charged a borrowing fee, which will be included in the interest adjustment applied to your position. Dividend adjustments are applied if you have an open position in a share on the ex-dividend date.