CFD on Shares

A contract for difference (CFD) is an agreement to exchange the difference between the opening and closing price of the position under the contract on various financial instruments.

CFD is an example of margin trading which allows an investor to take more profit as he uses the leverage. It means that an investor can buy CFD even if he doesn’t have the whole value to purchase shares. For example, to buy the Microsoft shares at the amount of $10,000 you need a deposit of only $1,000. If you take a profit of $1,000 your return is 10% if you trade the underlined shares, but you have 100% of return if you trade CFD. But you must be aware that losses are calculated the same way.

We can say that a contract for difference can be qualified as purchasing shares on the proceeds of the credit. If you trade CFD you get all the benefits of the underlining share, including price rise and dividends, and pay off on-credit expenditures to the seller. It’s a sort of a bank credit: you borrow money to buy shares and get the benefits of a shareholder and the bank takes an interest. CFD presents this process as a single deal.

If you trade CFD you don’t get dividends as real shareholders as you deal with «Dividend Adjustment». This means that on the day called ex-dividend date, if you have open positions, your account will be credited or debited 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 at the same basis as share dividends. For more information about the dividends apply to the page: «Dividends for CFDs on shares».

Long position

You've decided to purchase the Microsoft shares, get the quotes 23.97/24.00 and buy 100 shares at 24.00. Then:

To make this deal you need $240.00 on your deposit.

Credit Settlements

Credit settlements are required when you leave your position open till the end of the trading session. Credit settlements are calculated based on FED funds rate (for US Stocks) and the closing price of the share.

For example: FED Funds rate is 1.75%, and the closing price of Microsoft shares is $ 25.00. So, your credit settlement is calculated the following way:

N_Stocks x P_Close x Interest / N_Days =
= 100 x $25.00 x (1.75% + 1.25%) / 360 =
= $0.208

Closing a Position

Three days later Microsoft shares are quoted at $25.50/25.53, and you chose to close your position by selling at $25.50:

Short position

Let’s assume that American Express shares are overpriced and you decide to sell Contract for Difference for 200 American Express shares. They are quoted at 33.90/33.94 and you sell CFD on 200 AXP shares at 33.90.

To make this deal you need at least $678.00 on your deposit.

Credit Settlements

Credit settlements are required when you leave your position open until the end of the trading session. Credit settlements are calculated with regard to FED funds rate (for US Stocks) and the closing price of the share. For example, FED funds rate is 1.75%, and the closing price for AXP shares is 33.10. Then, you are credited the following way:

N_Stocks x P_Close x Interest / N_Days =
= 200 x $33.10 x (1.75% - 1.25%) / 360 =
= $0.09

Closing a Position

Seven days later AXP shares are quoted at $33.36/33.40 and in the rising market you make a decision to close the position by buying 200 AXP shares at $33.40 as a CFD.

So, you have a return of 14% on your initial investment.

Contract Specification.