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• Glossary

What are CFDs?

CFDs on ETFs (also called index shares)

Index-linked financial instruments have been growing in popularity among private investors because they allow you to have a diversified and low cost index investment.

Index investment means that you are able to track the price and yield performance of any index. You build your investment portfolio on the basis of the constituents of any index. For small private investors it's difficult to invest in NASDAQ 100 or S&P 500, because you have to have more than one share of any company listed in these indices. This has meant that until recently, only professional investors with large portfolios could invest in indices.

The first step in opening of this type of investment to small traders was made in 1993 when the S&P unit investment trust was introduced. Its shares are traded on the AMEX with the ticker SPY. Known as SPIDERS, each SPDR (Standard & Poor's Depositary Receipt) share represents 500 stocks of the Standard & Poor's 500 Composite Stock Price Index (S&P 500).

Further steps were made in 1997 with the introduction of DIAMONDS, an index product based on the Dow Jones Industrial Average, appeared (DIA, trade around 1/100th of the value of the Dow); and in 1999 the introduction of the Nasdaq-100 Trust (QQQ - Cubes, trade around 1/40 of the value of the Nasdaq 100). Nowadays ETFs are very popular among private and institutional investors. On December 14, 2005 their prices were:

Many investors prefer to trade Cubes, Diamonds and Spiders, as you don't have to be a market pro to use them. When you trade single shares you have to analyse both the company's weak and strong points and overall economic outlook. There is no need to make an in depth analysis of each corporation when you trade ETFs. ETFs price movements usually reflect macroeconomic factors and situation.

The main points you need to note are:

• The ETF price is not fixed and depends on demand and supply. However, the price of SPY is usually traded near 1/10 of the value of S&P 500; DIA is usually traded near 1/100 of the value of DJIA 30; QQQ is usually traded near 1/40 of the value of NASDAQ 100.
  

• Index trust shares are highly liquid. Day volume can exceed 100 million shares.
  

• Dividends on SPY and QQQ shares are paid on a quarterly basis, and because of the nature of the listed companies, these amounts are rather small. Dividends on DIA shares are paid on a monthly basis.
  

• Profits/losses and margin for CFD on ETF are calculated in the same way as for single share CFD.

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