Cost Comparisons

CFDs can be a very cost effective way of investing in the stock market, although of course there are greater risks attached to trading on margin.

Trading CFDs

1. Trader A buys 10,000 Vodafone CFDs on the open at 287p and sells them at lunchtime at 296p.
2. In the afternoon he sells 750 Bookham CFDs @ 4300p and buys them back the next morning at 4220p

Trading via a traditional stock broker

Trader B uses his usual stockbroker Piers Dibben-Smythe who charges an extremely commercial 0.15% dealing commission

Comparison in terms of return on equity

A stock trader and a CFD trader are both positive on the outlook for Cadbury Schweppes, trading at 400p. The direct equity investor buys 6,000 shares, pays 0.5% stamp duty and 0.15% commission; the CFD buyer gains 5 times leverage by buying 30,000 CFDs in Cadbury and pays 0.25% commission. Cadbury Schweppes subsequently rises to 450p and in the period between buying and selling the position the stock pays a 5p net dividend. Both positions are open for 20 days.

* Financing costs for the CFD trader are calculated as follows: With base rates at 5.75%, the CFD trader has effectively borrowed £96000 from the CFD provider at 8.75% for 20 days.

However, the leveraged nature of CFDs could result in increased losses in the event of an adverse move.