What is a CFD?
A Contract For Difference is an investment instrument used by active investors to capitalise on their market view
In essence a CFD is an agreement between you (the investor) and marketindex (the CFD provider) to exchange the price difference of an asset between when you open the CFD and when you close it.
Unlike traditional share dealing, with CFDs you can take a view on both rising and falling markets and trade using leverage.
There is no physical ownership of the underlying asset with a CFD meaning you do not receive voting rights or dividends.
CFDs are traded on leverage, meaning you pay only a small fraction of the total trade value to open your position rather than paying for it in full, this is known as margin trading.
With marketindex you decide the fraction of the price (the margin) you are prepared to invest by adjusting your account leverage. You can choose to pay a margin as low as 1/50th of the total value of the position; however you may be restricted by the maximum leverage level applicable to each marketindex underlying.
Selecting a lower leverage means a higher margin creating a more conservative investment, whereas higher leverage creates a lower margin and a more aggressive investment.
Margin trading is comparable to executing a physical trade financed by a loan. As such, you receive or pay financing costs on open trades.
Leverage can amplify your return; however, your losses are amplified in exactly the same way if the market moves against you and can lead to losses exceeding your initial margin.
Go Long or Short
With CFDs you can; go long (buying the market) or; go short (selling the market). Remember whether trading long or short you are trading with leverage. This can amplify your return; however, your losses are amplified in exactly the same way if the market moves against you and can lead to losses exceeding your initial margin.
If you believe that a particular market is going to rise, you can go long. For example if you go long EUR/USD, you buy EUR and sell USD. If you are correct, you can later sell your EUR at a higher price, making a profit. If you are wrong, you incur a loss by selling EUR at a lower price than you bought at.
If, on the other hand, you think a particular market is going to fall, you can go short. For example if you go short EUR/USD you sell EUR and buy USD. If you are correct, you can later buy back EUR at a lower price, making a profit. If you are wrong, you will incur a loss as the EUR price has risen and you must buy back EUR at a higher price.
No stamp duty
A CFD is a derivative product, you don't own the underlying and therefore it is exempt from stamp duty.
Tax laws can change and are subject to your circumstances, we recommend you seek independent advice.
The spread is the difference between the bid (sell price) and the ask (buy price). Whilst the buy price is always higher than the sell price, it is important to understand that the spread will vary between markets and can change depending on market conditions.
The wider the spread, the more the market will need to move in your favour before your trade will be profitable.