What is an equity CFD?
An equity CFD is a margin traded product which allows investors to receive all the profit and loss of a share without owning the physical shares. An equity CFD is traded, quoted and performs in the same manner as the physical share. To put it simply, a CFD is a leveraged way to buy and short shares using margin. Margin means around 10% to 20% of the value of the shares has to be put up in a deposit and the balance is lent by the CFD broker.
Is UK Stamp duty levied on CFD?
No, CFDs are not subject to UK stamp duty (0.5%), offering for example a £50 saving on a purchase of £10,000 worth of Tesco shares.
How will corporate actions such as a Rights Issue affect my CFD?
You will receive all the benefits of any corporate action on the underlying share (or the cash equivalent), this is credited to your account. However, a CFD holder is not allowed to vote in company resolutions etc.
How are dividends handled?
Net dividends are credited to long CFD positions and debited from short CFD positions. If you are long a share (via a CFD) that pays a dividend then you will normally receive 90% of the dividend value. Short traders will have to pay 100% of the dividend. More information on CFDs and dividends
What is the minimum and maximum trade size I can transact using CFDs?
The minimum transaction size depends from broker to broker but can be as low as 1 share and there is no maximum transaction size, subject to margin requirements and the liquidity of the underlying share.
How long can CFDs be held?
There are no expiry dates on CFDs, so long or short the CFD position may be held indefinitely.
It should be noted that because interest is charged on long positions they become expensive to run versus buying the cash stock after about one month. CFDs were never designed to be products for 'investment', rather to trade short term moves.
What markets can CFDs be traded in?
UK, European, Dow Jones, S&P and Nasdaq markets, stocks and indexes. But CFD brokers will normally only let their clients trade in liquid stocks with plenty of volume. If a client wants to trade a CFD on a smaller stock then the broker can confirm whether this is possible over the phone.
Do I need to have a specialist CFD broker or can I use my traditional stockbroker?
Some stockbrokers offer CFDs but it's normally better to get a dedicated CFD broker because they'll have specialist departments dedicated just to the product. A CFD broker is also likely to offer specialised CFD trading software.
Are CFDs available on other products?
In theory they are available on stock indices, futures and options, but differs from broker to broker.
How do CFDs compare to Spread Bets?
CFDs are often cheaper to trade than spread bets especially for traders doing many short term trades. However profits on spread bets are 100% tax-free whereas tax has to be paid on CFD profits. A good idea is to have both a spread bet account and a CFD account and then on any given trade work out the merits of using one CFDs over Spread Bets.
See the LearnMoney.co.uk section on Spread betting for more information.
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