The Essential Guide to

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Advantages and Disadvantages


Ability to trade a wide range of markets

CFDs are offered on thousands of instruments including Shares, Indices, Sectors, Commodities and Treasuries. You can trade on all of the top UK stocks and some of the more popular small cap stocks as well as all major indices in the UK and overseas.


Trading in CFDs gives you the ability to establish a short position as easily as a long position. CFDs provide an easy way to take advantage of a negative view on a stock or falling market conditions.

CFDs have no expiry date so positions can be run indefinitely (there may be exceptions). Short positions also generate a cash balance from the sale of the stock, which the CFD provider passes on in the form of daily interest.

Trade on Margin

This is also known as gearing or leverage. When buying shares in a company an investor must pay the full purchase price, so 1,000 shares for 250p would cost £2,500. When trading a CFD the client is able to create that same exposure but pay less cash. Typically the margin is 5%, so to open a position worth £2,500 the client only needs to pay £125 up front.

This means that you only have to allocate a small proportion of the total value of your position to secure a trade, while maintaining economic exposure to the relevant underlying instrument. This magnifies the profits against the initial outlay.

Low cost execution

Retail commission rates are generally around 0.1% of the contract value, although traders who trade heavily can sometimes receive more commercial rates. Under current legislation there is no stamp duty payable on CFD transactions. For short term traders these factors are significant. Indeed for traders who never run positions overnight, CFDs are clearly very effective.

No stamp duty

Although CFDs incur funding costs they do not incur the immediate 0.5% stamp duty charged when trading traditional stocks.

Potentially benefit from rising and falling markets

CFDs allow you to take both long and short positions, this means you can benefit from both falling and rising markets.

Going short in the physical market with traditional stocks is extremely limited and difficult. Most stockbrokers will not offer this service, and if they do it is only to very large clients and for very large trades. CFD providers allow any trader to take a short position in the market, even for very small trades.

Therefore, on this basis, a CFD may be a more effective means for a trader to implement strategies to attempt to profit from falling markets (and short term intraday movements) and may also be used to hedge long positions in the physical market.

Stop Orders

It is usual to be able to place a stop loss order to be automatically filled. This means you can exit automatically to protect losses.


Trade on a margin

On the downside, a volatile CFD can expose buyer to margin calls in a downturn, this often leads to losing a substantial part of assets or losses on your investment depending on how the market moves.

Funding costs

There is a crossover point when the funding costs of the CFD overtake the saving made on stamp duty. An approximation of the point at which the funding cost matches the 0.5% of the transaction value in days is (0.5/0.8) x (365/3) = 76 days i.e. about 11 weeks. In other words, for trades that last for less than three months, it is economically more viable to trade the CFD rather than the underlying stock.

This is of course a crude measure as there are other costs involved and different factors that need to be taken into consideration (such as positions traded more or less than originally anticipated for example) but it is a useful comparison.

No perks

You don't pick up the perks of actually owning the shares; you are not entitled to vote or attend company meetings. However, with online share trading, most investors will hold ‘nominee’ accounts which also don’t entitle them to any perks. For anyone who is already trading shares online, this limitation of CFDs will probably go unnoticed.

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