A Contract for Difference (CFD) is an agreement to exchange at the close of a contract, the difference between the opening price and the closing price of a trade multiplied by the number of shares specified within the contract. With a CFD you may receive many of the benefits of stock ownership (such as dividends and price performance) while you do not actually take ownership of the underlying stock.
Each Contract for Difference corresponds to an individual share, indices or commodity. A CFD mirrors the ups and downs of the corresponding share.
Share CFDs have no fixed contract period, leaving you free to buy and sell the CFD whenever you wish during market trading hours. Both Commodity and Index CFDs have fixed expiry dates and if you have not closed an open position by its expiry date, it automatically closes. You can check the expiry dates for expiry CFDs by selecting the “i” button on the CFD trading platform.
With CFDs you do not own the underlying instrument so there are no share certificates issued and you do not have any voting rights. Instead, you settle the difference between the opening and closing prices and the difference after taking into consideration the financing charges is your profit or loss.
Margin & Leverage
All CFDs are traded on margin. Margin is the amount of money you are required to put on deposit in order to gain full exposure to the value of the trade. The margin rate for each contract varies according to the market capitalisation and volatility of a particular share. Your margin requirement changes as the value of the underlying position changes and the correct margin level must be maintained while a trade remains open.
Example of calculating margin
| Company |
ABC plc |
| Currency |
Euro |
| Quoted price |
110.80-114.80 |
| Open position |
1,000 CFDs @ 114.87 |
Total Exposure
(price x number of CFDs) |
€114,870 |
| Margin Rate |
10% |
Margin Requirement
(Mid-price x number of CFDs x margin rate) |
(112.80 x 1,000 x 0.10) = €11,280 |
Margin works by requiring you to put an amount of money on deposit which can be used to gain exposure to larger position. While leverage can magnify your gains it can also multiply your potential losses and you should carefully consider if this risk is suitable for your financial position.
Charges
The main costs involved in trading CFDs are an overnight financing charge and commission.
Financing Charge
Any CFD position held overnight becomes liable for a financing charge. When you enter into a CFD trade you are in effect entering into a credit transaction with Delta Index as we must make the necessary liquidity available to you. All financing charges are calculated daily at the close of business. The amount you are charged depends on the total value of the position you hold and the direction of your position. If you hold a long CFD position you are charged cost of funds plus the Delta Index financing charge. If you hold a short CFD position you are eligible for the difference between the cost of funds and the Delta Index financing charge. Cost of funds is defined as the Interbank Offer Rate in which the contract is quoted e.g. for UK shares this is LIBOR (London Interbank Offer Rate).
To view our financing charges click here.
Commission
There is a commission payable when you open or close a contract. Commissions vary but on liquid shares, the commission rate would typically be 0.05%. Please click here for more information on our commission rates.
Dividends
Although you are not the beneficial owner of the shares, you are eligible for the effects of dividends if you hold an open position in a company on the ex-dividend date. How you are affected by dividends depends on whether you hold a long or a short position in the underlying company on the ex-dividend date.
Holders of Long positions:
The holder of a long CFD will receive, on the ex-dividend date, a payment that equates to the net dividend of the underlying share.
Holders of Short positions:
A holder of a short CFD position will, on the ex-dividend date, be charged the gross dividend by way of debit to their account. You are advised to check the dates of any impending dividends before entering into Equity CFD positions.
Tax
While tax treatment varies across jurisdictions, broadly speaking, any gains (including dividend income and financing payments) made on a CFD trading are liable to Capital Gains Tax (CGT). Gains are usually off-settable against losses which can reduce any tax liability. Of course investors should seek their own tax advice to confirm this. All investors are solely responsible for tax reporting to their domestic tax authority.
Risks
A Contract for Difference involves high risk and is only suitable for those willing to accept that risk. Wins and losses on CFDs can be many times your original investment. Depending on the nature of your trade your losses may exceed your initial deposit. You should only trade if you are prepared to accept that degree of risk. You should always estimate the worst case scenario before you trade. Contracts for Difference or any investment in shares, indices, commodities and similar and derivative products carry a high degree of risk and uncertainty and you are solely responsible and liable for decisions and transactions which you make arising there from. Past performance is not necessarily indicative of future results.
Please refer to Section 1 of the Delta Index Contract for Difference Terms and Conditions for full details of the Risk Warning Notice.
Disclaimer
Current US legislation prohibits Delta Index from entering into Contract for Difference transactions with US residents. US residents include any natural person resident in the US (other than a short term basis) and any account held for the benefit of a US person. We recommend you seek independent advice regarding your personal situation.
Trading different contracts
Delta Index offers a wide range of Contract for Difference contracts for you to trade on. In choosing which area to trade you should bear in mind more than your area of interest: commodity trading, currency trading etc. It is important to remember that different classes of contracts have varying levels of leverage. Remember, leverage multiplies both gains and losses.
Each market is open at different hours. To see the precise opening hours on any contract just click on the "i" button beside the contract on the client trading screen or call us on 1850 88 20 20.
New Orders, Stop Loss, & Limits
New Orders
A 'New' Order is an order that is not attached to any existing trade and is independent of any other instruction. A new order is used to open a trade at a level in the market which has not yet been reached. New orders may be placed above or below the current Delta Index quote within the minimum distance constraints. Any order activated by 'gapping' or fast market action will be filled at the first price at which Delta Index could reasonably be expected to attain (See Term 11 in our Contract for Difference Terms and Conditions ). No orders are guaranteed. A new order will not be cancelled by any other actions on an account and will only expire when it is cancelled, when the relevant market expires, or when it expires due to any Good for the Day (GFTD) instruction.
The new order functionality is useful for placing orders at critical market points; it will ensure that you do not miss an opportunity. When a new order is executed, it automatically creates a new stop loss order if you have automatic stop losses enabled. You may then add a limit order to the trade if you wish.
Stop Loss Orders
The stop loss order is used to limit your risk on a trade. Stop Loss Orders are automatically generated when a new position is opened.
The level is defaulted at 50% of the margin required for the position however we encourage all clients to adjust this as soon as the new position is opened. Stop loss orders will be triggered automatically when the target price is hit and the existing position will be closed. If the position is closed manually or by hitting another order, the associated stop loss order will be automatically cancelled. Note that stop loss orders are not guaranteed and there is a risk that gapping may occur. In this event, orders will be filled on a best efforts basis.
Limit Orders
Limit orders may be added while a new position is been opened or at any time afterwards while the position remains open. A limit order is an order to ‘take profit’ if the position moves in your favour. Target levels may be adjusted at any time. Note that if the position is closed manually or by an alternative order, the associated limit order will be automatically cancelled.
Contingent Orders
Alternatively you may place a contingent stop loss or limit order on a new order, for example, if you place a new buy order, you can also stipulate the number of points you would like the stop loss and limit attached to the new order to be placed at. For example, you leave a new order to buy 100 AIB CFDs at 8.50 when it is currently trading at 8.05. If this level is reached and your new order executed, you want to place your stop loss 50 points below the target price at 8.00 and the limit distance 150 points above at 10.00. These secondary orders are ‘contingent’ on whether the initial new order is executed.
Closing a Trade
Closing a trade can be done two ways:
1. Go to the open positions tab, choose the trade that you wish to close and click on the close tab on the right hand side. This brings up a box with a live price and a sell button (or a buy button if your trade was a short). Click the button and your trade will be closed.
2. Go to the markets tab, choose the instrument that you want to close and make an opposite bet to the one you are closing. For example, if you bought 100 AIB CFDs, just make a sell for 100 CFDs on AIB. This will net off one trade against the other and the position will be closed.
Expiry of Trades and Rollovers
Both Commodity and Index CFDs have fixed expiry dates and if you have not closed an open position by its expiry date, it automatically closes.
Rollovers
If your trade is nearing expiry, you can easily extend it for a further period of time. Within a month of expiry, Delta Index opens the new far contract; during the crossover period you can 'roll' your position on to the new contract by closing out of the existing position at the mid market price and opening the same position on the new contract . Any open profit or loss will be crystallised and show in the account summary, however the new open position will be priced at the current price level.
In the case of a rollover you are paying only half of the spread on the new contract rather than the full spread as you would have been charged had you opened a new contract in the conventional way. You can rollover as many times as you wish, each time paying only half of the regular spread.
To discuss rolling over your position, call us on 1850 88 20 20 or email us at client@deltaindex.com . Alternatively use the online ‘rollover’ facility in the open positions tab