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KEY FEATURES OF CFDS
Margin
When trading on margin investors are asked to deposit a small percentage of the overall cost that would be required if they were to purchase the equivalent shares in the physical market. Even though the CFD investor's outlay is small in comparison to the equivalent physical trade, the investor will still be exposed to the same potential profit and loss. This means that your potential Return on Investment is magnified. Our margins are as low as 2% when trading share CFDs so if you want to buy $50000 worth of shares, you only need to have $1000 on deposit in your account.
Broad range of Markets
A further positive aspect of trading CFDs is that they offer the private investor a derivative investment on a wide range of underlying assets. Hence CFDs may encompass contracts based on global shares, indices, currencies and commodities.
'Long' or 'Short'
CFDs allow one to take either a 'long' position or a 'short' position. A trader would take a long position if he/she believed the underlying asset would rise and naturally would take a short position if they believed the underlying asset would fall.
'Leverage or Hedging'
CFDs like most derivative products provide the trader with greater 'leverage' or 'gearing' with regards to investments. Basically, if the underlying asset upon which the CFD is based moves in any one direction, then this will be amplified by the movement in the value of the CFD. Hence, profits or gains on an investment are amplified and equally losses are greater too.
Naturally the ability to go 'short' means one can profit even from a falling market and also allows one to 'hedge' one's portfolio from falls in the stock market or an individual share in which one is invested.
Interest payments
Importantly the purchaser of CFDs will incur costs and benefits in respect to taking either a 'long' or 'short' position. Critically, an individual with a long position will incur daily interest payment costs, but will receive a payment based on the net dividend of the underlying equity, just like with ordinary shares. Conversely, an individual with a short position will incur dividend payment costs, but naturally will receive daily interest payments when shorting equity. Note also interest rates will fluctuate depending upon the volatility of the market and/or the volatility of the individual equity.
- Long position = Account is debited to reflect interest payments
- Short position = Account is credited with interest payments
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