Trading Contracts For
Difference
Trading CFDs is similar to trading equities. When opening a
position you will be quoted a bid and an offer price. You will then
be asked how many CFDs you would like to trade and whether you
would like to trade long or short. On opening and closing a
position you will be charged a commission.
However unlike equities, Contracts For
Difference do not currently attract UK Stamp Duty,
since you do not physically own the underlying equity but rather a
derivative that moves in line with underlying investment.
Contracts For Difference differ from equity
trading is that when opening a position you are not required to pay
for the full value of the trade but rather you are required to
deposit the Margin Requirement.
The Margin Requirement is normally calculated as a percentage
of the total value of the trade. Please refer to the Market
Information Sheets for a full list of Margin Requirements. During
the period when a CFD position is held open you are also required
to maintain the margin requirement for the trade.
Financing
Financing is charged on all open positions held overnight and
is levied on the total value of the position. For long positions
your account will be debited the financing fee, whereas with short
positions you will receive the financing fee (subject to interest
rate levels). This is only paid when a position is held overnight
and paid to your account daily.
For a position held on a Friday or prior to a TD Waterhouse
CFDs non-business day in the relevant market, financing will be
applied on the number of days until the next TD Waterhouse CFDs
business day (e.g for a position held at the close of business on a
Friday, financing will be applied for 3 days, assuming the next TD
Waterhouse CFDs business day is a Monday).
Dividend Adjustments (equity and equity related
CFDs)
A dividend adjustment is credited to long positions and
debited from short positions held at the close of business on the
day before the ex-dividend date. Payment is credited or debited to
your account on the ex-dividend date.
Corporate Actions (equity and equity related
CFDs)
Contracts For Difference positions will be
adjusted in the event of a corporate action (for example a rights
issue). The adjustment will be to replicate the corporate action on
the underlying equity. If this is not possible then TD Waterhouse
CFDs may, at its discretion, make an equivalent cash adjustment.
This will apply to positions held at the close of business on the
preceding business day to the ex-corporate action date.
However, Corporate Actions, do not show how to
fund any running/open losses. It is important that you understand
that in addition to your Margin Requirement, you will have to fund
your account if your open trade is showing a loss.
| Example |
|
A Long CFD Position on ABC Plc
You decide to buy ABC Plc. A TD Waterhouse CFDs trader quotes
you 860/861 and you buy
CFD on 2000 shares at 861p. You pay no UK Stamp Duty.
|
| Opening Trade |
|
|
Price of ABC Plc
Number of Shares
Value of Shares
UK Stamp Duty
Commission
Margin Requirement (10%)
Initial Investment
|
861
2,000
£17,220.00
£0.00*
£34.44 (0.20%)
£1,722.00
£1,756.44
|
* Tax laws may change
Daily Financing
On a nightly basis you pay financing for this position based
on Sterling LIBOR and the daily closing value of the shares. Your
financing rate might be LIBOR(*) + 2.50%.
Assume that this equates to a financing rate of (4.50%+2.50%)
7.00%, and the closing price for the day is 861p.
You will pay 2000 x 861p x 7.00% / 365 = £3.30 for holding the
position overnight.
This will be debited from your account on the next trading
day.
3 days later ABC Plc is quoted 892/893 and you sell a CFD on
2000 shares at 892p.
| Closing Trade |
|
|
Price of ABC Plc
Number of Shares
Value of Shares
Commission
Closing Value of Shares
Opening Value of Shares
Profit on Trade
Total Commission
Financing (3 days)
Overall Profit on Trade
|
892
2,000
£17,840.00
£35.68 (0.20%)
£17,840.00
£17,220.00
£620.00
(£70.12)
(£9.90)
£539.98
|
The profit on initial investment in this example is 30.7%
(539.98/1756.44).
(*) LIBOR is the widely accepted reference rate used by the
banking system. It is different for each currency and reflects bank
deposit activity.
| Example |
A Short CFD Position on XYZ Plc
You think XYZ Plc is overpriced so you decide to sell short a
CFD on 2000 shares of XYZ Plc.
The quote given by a TD Waterhouse CFDs trader is 825/826 and
you sell a CFD on 2000 shares at 825p.
|
| Opening Trade |
|
|
Price of XYZ Plc
Number of Shares
Value of Shares
Stamp Duty
Commission
Margin Requirement (10%)
Initial Investment
|
825
2,000
£16,500.00
£0.00
£33.00 (0.20%)
£1,650.00
£1,683.00
|
Daily Financing
On a nightly basis you receive financing for this position
based on Sterling LIBOR and the daily closing value of the
shares.
Your financing rate might be LIBOR –3.00%.
Assume that this equates to a financing rate of (4.50%-3.00%)
1.50% and the closing price for
the day is 833p.
You will receive 2000 x 833p x 1.50% / 365 = £0.68 for holding
the position overnight.
This will be credited to your account on the next trading
day.
3 days later XYZ Plc is quoted 855/857, you buy back the CFD
on 2000 shares at 857p.
| Closing Trade |
|
|
Price of ABC Plc
Number of Shares
Value of Shares
Commission
Closing Value of Shares
Opening Value of Shares
Profit on Trade
Total Commission
Financing (3 days)
Overall Profit on Trade
|
857
2,000
£17,140.00
£34.28 (0.20%)
£17,140.00
£16,500.00
(£640.00)
(£67.28)
£2.04
(£705.24)
|
The loss on initial investment in this example is 41.9%
(705.24/1683).