Trading in CFDs and Spread bets involves risk and your losses can exceed the funds deposited on your account
Leverage is the name given to trading on financial instruments without paying for the full risk up front. If you buy shares, you would be expected to pay for the shares up front however, with a CFD or SpreadBet on that share, (a leveraged product) you pay only a percentage of the risk up front. This means as a trade, the risk is much higher than investing in equities and paying for them at the point of trading
Contracts for Difference (CFD)
Contracts for Difference (CFD) are derivative products the price of which is based on an underlying security or instrument that allows you to benefit from successfully predicting the movement of the price of the underlying instrument. You will never actually own the instrument upon which the value of the CFD is based. CFDs are often used for short-term speculation on the value of the instrument that offers a choice to the investor who previously could only purchase or sell the underlying instrument.
We offer CFDs on Equities, Index, Commodity, FX, Metal and various Options markets in regions across Europe, the UK, US and others. For a full list of our current market list, please consult our market information that’s updated from time to time.
A CFD traded on a single stock Equity, for example, will involve the opening of a new position through either the purchase or sale of the share and you will be trading in a denomination of shares. The reverse process will close out the position and your net profit or loss is the difference between the buy and sell price multiplied by the number of shares:
Purchase 1000 Equity CFDs at £5 and sell at £5.10
Your profit is 10 pence x 1000 CFDs = £100.
Spread-bets (SB) are a form of CFD and are a feature of the UK and certain other jurisdictions where there are tax advantages in that SBs are not subject (in the UK) to capital gains tax (in the event that the trader is successful). In addition, trading a CFD will incur a commission charge whereas a spread bet will have the commission charge already wrapped in the price you pay for the derivative.
We offer spread bets on most of the same markets as we offer CFDs and have developed these products to be tradable in the currency of the underlying instrument. For example, a trade on the price of Vodafone will be traded in Sterling whereas a trade on the US listed stock, Amazon, will be traded in US Dollars.
Options are a form of derivative instrument that can be used for a large variety of purposes including:
• Portfolio hedging
• Low risk trading
Perhaps you have an existing portfolio of equities and have no desire to increase your exposure to this asset class but you are nervous of the potential downside in a sizeable market move. This is an opportunity to hedge your exposure and you can do this in a umber of ways with options:
• Hedge your entire portfolio on a ‘value at risk’ basis meaning you would calculate the asset value you own and would be able to purchase ‘downside’ protection through the purchase of ‘put’ options
• Hedge part of your portfolio where you are most exposed. For example, you own a range of FTSE100 shares but 25% of your risk is in one stock. You could hedge this one position by purchasing ‘puts’ in the one stock.
This is a very simplistic example of the use of options to hedge exposure and is not in any way intended to be a recommendation. We would, however, recommend you speak with options specialists to discuss the most appropriate action for you.
Low risk trading
Buying either/both puts and calls allows you to take a view on a market whilst ensuring you have a maximum guaranteed potential loss since the amount you could lose on an options trade is equal to the amount you have paid out for the option itself.
For example, with BP trading at £5 per share, you believe their price will improve over the next 6 months to be above £6 per share. You therefore want to benefit from this movement and decide to buy a call option with a strike price of £5.50 for expiry in 6 months. You are quoted a price to buy of 18 pence per contract.
This means, the price must move beyond your strike (£5.50) plus your premium (18 pence) to be profitable although you will get some of your money back if the price, at expiry, is between £5.50 and £5.68. Your maximum loss will be the premium (18) * the number of contracts * contract value (£10) whilst you upside is the contract value (£10) per point (per contract) for every point the market moves above £5.68.
Therefore, at £7 on the expiry date, the value of one contract would be the strike plus the end of day settlement price of £7 minus the strike + premium paid (£5.68) equalling 32 pence or £320 per contract.