• Market Analysis Guide
  • Intro
  • Technical Analysis Guide
  • Bill William’s Chaos Theory
  • Japanese Candlesticks Theory
• Video Tutorials
  • Intro
  • Alpari Research: Technical Reports
  • What is Forex and How Does It Work?
  • Introduction to Charting
  • Introduction to Technical Analysis
  • Risks
  • Using Technical Indicators
  • Introduction to Fundamental Analysis
  • Gold and Silver
  • Money Management
  • Position Sizing
  • Understanding and Trading the News
  • Earning Interest in Forex
  • Introduction to Fibonacci Analysis
  • Economic Indicators
• Autochartist
  • Intro
  • Download Autochartist
  • Autochartist Tutorials
• Glossary

What are CFDs?

Share CFDs

Contract for Differences, also commonly known as a CFD, is a derivative that allows investors to speculate on underlying asset price movements, without the need for ownership of the underlying asset. CFD is a margin product which enables you to have higher return by using so called gearing (leverage). This means that you do not have to pay the full value of the underlying asset.

Gearing (leverage) is the term used to describe margin requirements: the ratio between the collateral and deal size: 1:20, 1:40, 1:50, 1:100. Leverage 1:10 means then when you wish to open a new position, then you must have a deposit a tenth of the contract size. For example, to purchase $10,000 worth of Microsoft shares you only need to deposit $1,000. If you physically trade shares, a $1,000 profit in the underlying shares equates to a return of 10%. If instead, you trade these shares as a CFD, then this would equate to a return of 100%. Please note, that because of leverage, losses will be magnified as well.

Trading share CFDs can be described as opening a position on the proceeds of credit. If you buy share CFDs, you get all the benefits of the underlining share, including price rise and dividends, and pay off on-credit expenditures to the seller. It can be compared to a sort of a bank credit: you borrow money to buy shares and get the benefits of a shareholder would receive, and pay the bank interest.

If you trade CFDs you will not receive dividends in the same way that shareholders would. You will receive instead, a "Dividend Adjustment". This means that on the ex-dividend date, if you have open positions, your account will be credited or debited on the payment date to reflect those adjustments. If you have long position the adjusted amount is credited, if you have short position it is debited. Dividend adjustments are calculated on the same basis as share dividends.

Example:
On March, 8, 2004 (Declared Date) Board of Directors of Verizon Communications (VZ) announces a quarterly dividend payout of $ 0.385/per share; Ex-DateInvestors who purchase stocks before this day are eligible for the dividend payout. - 06.04.2004, Record DateThe date when the Board of Directors determines which shareholders are entitled to receive dividends. - 09.04.2004, Payment DateThe date on which dividend payments are made (by a bank transfer, cheque etc.). – 03.05.2004.

• The CFD holder's trading account will be credited for $ 38.50 per 1 lot (100 stocks) on April, 6, before the trading session begins, if he or she has a long position: 100 x $0.385=$38.50
• The CFD holder's trading account will be deducted for $ 38.50 per 1 lot (100 stocks) on April, 6 if he or she has a short position.

Read more:

• Going Long
• Going Short
• CFDs on ETFs

© 2004-2012 Alpari LTD