CFDs
Contract for differences (CFDs) is a derivative contract with an authorized and regulated dealer to exchange the difference between the opening and closing values of an underlying financial instrument, multiplied by the number of CFDs in the contract.
At closing the differences are made through cash payments rather than delivery of physical goods or securities. The underlying instrument in a CFDs contract can be a share, stock index, bond, interest rate, commodity or currency. It is a derivative that allows traders to speculate on the price of an underlying asset. When trading CFD contracts, you don’t actually own the underlying product, you are just speculating on its future direction (both directions).
CFDs Explained
CFDs were originally created to imitate traditional share trading, but differ due to the non physical delivery of the underlying asset or security. As a derivative product, investors or traders can seek to profit from price fluctuations without tying down large amounts of capital. This is because CFDs are traded on margins ranging from 1% to 40% of the underlying assets notional value.
Complementing CFDs margin trading is the leverage option that goes with them, investors can leverage their positions to their preference to maximize profits. CFDs also allow investors to take long (buy) or short (sell) positions with or without expiry date or fixed contract size.
Unlike traditional share or securities dealing, CFDs provide investors with effective risk management tools through different order types by which an investor can minimize losses and protect profits. Examples include Stop Loss and Limit Orders.
A Stop Loss order is a market instruction mainly used to exit a position at a predetermined price to minimize losses. It can also be used to open a new position at an inferior market rate. A Limit Order is a market instruction to exit a position at a predetermined price; it is mainly used to protect profits.
Through Knights Capital Markets (KCM), you can reap all the economic benefits associated with trading and investing in global equities, commodities, indices, and currencies without actually owning the underlying financial instruments. There are several significant advantages in trading CFDs through Knights Capital Markets:
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Competitive pricing on 2,900+ financial instruments.
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Real-time margin calculation and risk-management notifications.
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Award-winning trading platform and technology for complete trading confidence.
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Visual trading and one-click order entry.
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Phone or Online trading
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Place stops losses and other order types to help manage your risk.
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Turnkey customization for personalized services.
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Profit from rising and falling markets.
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Knowledgeable and professional support.
Like traditional investing, trading CFDs is inherently risky, and potentially more rewarding. Please make sure you understand the risks involved and the fact that losses just like profits can occur due to price fluctuations associated with financial instruments.
How They Work
Each Contract for Difference corresponds to an individual underlying equity, index, commodity, bond or currency, such as Barclays, S&P 500, Gold, US Treasuries and GBP. It is quoted exactly the same way, and its movement mirrors the ups and downs of the corresponding financial instrument.
A CFD position can be held for as long as the individual wishes, and can be bought and sold whenever you like at a click of a button through our trading platform. Unlike shares, with CFDs physical delivery are not taken and the settlement are cash settled on the basis of the difference between the opening and closing price of the underlying instrument, difference being the profit or loss.
CFDs are not traded on a stock exchange, but are transacted directly with a specialist market maker and offer no shareholder voting rights, no certificates and no stamp duty payment.
A long (buy) equity (stock) CFD holder is entitled to dividend payout declared by the company whilst the position is held even though you are not a physical owner of the underlying share. However, a short (sell) equity (stock) CFD holder will have the dividend payout amount deducted from their position whilst the position is held.
