What are CFDs?

The world of online trading is continually evolving. Shifts in market interests, changes and improvements to trading technology, strategies and automation; all of this is new ground upon which new regulation must be constructed in order to safeguard your investments. With the closing down of Banc De Binary, the trading community has become publicly aware the the term ‘Binary’ is fast becoming the proverbial fox in the hunt to control and re-structure hundreds of unregulated online brokerages. Meanwhile, CFDs are now offered by almost all online trading brokers. But what are they exactly?

Contracts For Difference, or CFDs, are unlike Binary options because they are considered a leveraged product. Instead, CFDs are often compared to Spread Betting as both contract options allow for the investor to go long or short but never own the underlying asset, involve a high degree of leverage for amplified losses and returns, and neither are subject to Stamp Duty. However there are some significant differences that make CFDs unique and beneficial to certain traders – these are outlined below:

Spreadbetting

• Bet an amount of money per point on the market going up or down
• Fixed timescale
• Capital Gains Tax free
• Commission free
• No Direct Market Access

CFDs

• Buy and sell contract that represents an amount per point in the underlying market
• Liable for Capital Gains Tax
• Commission paid to enter or exit market
• Direct Market Access
• Hedging benefits

To engage in a CFD you must first appreciate that you have no shareholder rights to the stock and note that the contract must be closed with the same broker it was opened with.  The asset may be an instrument of any sort – commodity, share, foreign exchange pair or market index. You can buy or sell the asset by going long or short on the contract, and the ‘difference’ is calculated from the opening and closing positions. Leverage is given by the broker in the format of margin requirements (up to around 10% usually), allowing you to buy or sell more than your means – helping you achieve greater reach, but exposing you to the changes in the value of the underlying asset.

There isn’t a designated expiry for CFDs, so a watchful eye is needed and risk management strategies such as Stop Loss Orders and Limits are recommended. You will have the opportunity to wait for a turnaround if your investment is turning sour, however a broker can choose to close out your position if it chooses to limit further losses on your behalf. However, on a successful outcome, CFDs can bring enormous returns on very little initial investment, diversifying your portfolio.