Contract for Difference (CFD).

CFD's were developed to allow clients to receive all the benefits of owning a stock without having to physically own the stock. In other words you cannot take delivery of a CFD so you have to settle the difference between where you bought the contract and where you sold it. The difference is either profit or loss.

Purchasing a single CFD would work in a similar way to purchasing a single Index contract. So for example the FTSE 100 Index is a composite of the 100 top UK companies. If you bought one FTSE contract and it was possible to take delivery of that contract, in effect you would need a number of share certificates of the pro-rata fraction of the 100 top U.K companies.

So you might receive a quarter of one B.T share. A half of one Vodafone share etc. However, you cannot deal in fractions of one share so when the contract expires you have to close it out and to settle the profit and loss. This is essentially a contract for difference.

Buying and selling the performance of a Share or Index through CFDs is almost identical to a physical equity trade financed by a loan. A client could borrow £10,000 from a bank to buy Shares. The client would receive the returns this process in a single transaction.

For example, if a client wants to buy £10,000 worth of Shares he or she will have to deposit with CMC a £700 margin. The client will then be allowed to purchase £10,000 worth of CFD Shares. The full £10,000 value of the Shares will be subject to the Share price performance. If the client wanted to keep these Shares overnight that would be subject to overnight financing charges on 100% of the trade. If a CFD position is not carried overnight there will be no financing charge to pay. Also as the client is trading Share CFDs and not the physical Share there will be no stamp duty to pay.

The other major benefit of trading CFDs is the fact that the client can trade on margin. CFD trading means clients can trade a full portfolio of Shares without having to tie up large amounts of capital. Using the example above, a client purchasing £10,000 worth of CFD Shares will only be asked for £700 margin.

Equity Performance
As with Shares, CFD investors benefit from normal market movements. Clients' open positions are valued every night at the close of business rates. Profits or losses will be credited/debited to the client's margin account each day. Corporate actions are applied to the client's account should they occur.

Financing
CFD Share positions carried overnight will incur financing costs for the unmargined portion of the position. If a client opens a position with a 5% margin, finance overnight will be on the 100% balance. Clients who are long a CFD will pay interest to CMC, clients who are short will receive interest from CMC.

Margin
Unlike physically purchasing stocks, clients only have to deposit a percentage of the value of the Shares, such as 5%. So if you want to buy £1,000 worth of Shares you deposit with the CFD share trading company £50.

Opening an Account
You can trade CFD shares by opening an account with any listed in our guide.