CFD: Introduction to CFD’s

Introduction to CFD’s

Contracts for Differences (“CFD‘s”) products were developed to allow customers to enjoy all the benefits of possessing a stock, index, ETF, forex or commodity position without having to physically own the underlying instrument itself. A customer enters into a contract for a CFD at the quoted price. The difference between that price and the price when the position is closed is settled in cash, giving rise to the name “Contract for Difference” or CFD.

Please note that by trading CFD’s customers can lose all the funds deposited. Please be aware of the risks involved.

With CFD’s customers can buy (“go long”) and close the position later by selling. Alternatively customers can sell (“go short”) and close the position later by buying. Selling at a higher/lower price than the purchase price yields a gain/loss accordingly.

CFD’s have grown in popularity over the past few years and we believe it is increasingly becoming the preferred way to trade the financial markets.

CFD’s work like this: instead of purchasing 1,000 Microsoft shares from a stockbroker, a customer could instead buy 1,000 CFD’s of Microsoft on the Plus500 Trading Platform. A $5 per share fall in the price of Microsoft would give the CFD customer a $5,000 loss or a $5 per share rise in the price of Microsoft would give the CFD customer a $5,000 profit , just as if he had purchased the actual shares that are traded on the Exchange.

Plus500 offer CFD’s on popular financial instruments. Other benefits include no Exchange charges and no Stamp Duty. Many of the inefficiencies of trading the underlying shares on the Exchange are eliminated. The costs and delays of physical delivery of the shares, their registration and any holding or safe custody charges made by a broker are all avoided. The other major benefit of trading CFD’s is that customers can trade on margin using leverage. CFD trading means customers can trade a portfolio of shares, indices or commodities without having to tie up large amounts of capital. Using the example above, a customer buying $50,000 worth of shares will only be asked for $5,000 initial margin for the equivalent CFD portfolio.

Any financial entitlements, such as dividends, are adjusted for in cash, directly to a CFD holder’s account. However, any voting rights available to the holder of an equity share are not available to the holder of an equivalent CFD.

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