What is stock? What drives stock prices? To introduce what Stock Index CFD is, we d like to introduce to you what stock. trading is first.

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1 To introduce what Stock Index CFD is, we d like to introduce to you what stock trading is first. What is stock? our private enterprise system. They spur job creation and economic growth while creating products and providing services that improve our quality of life. Owning stock means you own a slice of a public company. These companies span the global economy and form the core of When a company needs to raise money to expand, it sells stocks or bonds to the public through the financial markets. Individuals become investors in this company by purchasing those securities. Owning stock allows investors, large and small, to share in the world s economic growth and vitality. What drives stock prices? Simply put, the price of an individual stock is determined by supply and demand. The supply of stock is based on the number of shares a company has issued. The demand is created by people who want to buy those shares from investors who already own them. The more that people desire to own a stock, the more they are willing to pay for it. But the supply of shares of any stock is limited. Investors only can buy shares of stock that are already owned by someone else. So if one person wants to buy, somebody else has to sell, and vice versa. If a lot of people want to buy at the current price and not a lot of people want to sell, the price goes up until more people are willing to sell. When the price gets so high that buyers no longer want the stock, the price starts to drop. Indexes A stock index is a specific group of stocks, and whether its value is up or down reflects the combined price movements of the stocks in the index. The stock market reports its moves through a variety of indexes, because no single index can tell investors everything they need to know. Widely cited indexes include: Dow Jones Industrial Average (DJIA): An index of 30 blue chip U.S. stocks used to measure the performance of the U.S. financial markets. Introduced on May 26, 1896 by Charles H. Dow, it is the oldest stock price measure in continuous use and has become the most widely recognized market indicator in the world.

2 Standard & Poor s 500 (S&P 500): An index of 500 stocks that represents the price trend movements of the major common stock of U.S. public companies. NYSE Composite Index: This index closely reflects the broader market, as it represents 77% of the total market capitalization of all publicly traded companies in the United States. Furthermore, it encompasses 61% of the total market capitalization of all publicly traded companies around the world. A Company s Financial Health Supply and demand explains why individual stock prices fluctuate. But how do investors decide whether it is a good idea to buy or sell a particular stock at a given price? First, they need to consider the financial health of the company whose stock they are considering buying or selling. If it looks like a company is going to lose money perhaps the company just announced poor earnings then its stock has less value. Investors will pay more for a company with a history of earning strong profits and consistently paying healthy dividends. While a company s past performance is important, even more important are its future prospects. A company that has not been making money might turn around, perhaps under new management, after increasing its efficiency, or by developing an innovative new product. Likewise, just because a company has made money in the past does not mean it will continue to do so. Perhaps the company s successful CEO is retiring, the company is defending a big lawsuit, workers are threatening to strike or competition has heightened. Announcements along these lines could mean the company s future is uncertain or negative. A report that an individual or a company is trying to buy another business usually increases that business stock prices. That s because the purchaser has to buy a majority of the stock to gain control of the company. To do so, the suitor must persuade stockholders to sell their stock by offering an attractive price for their shares. Industry Information Another important factor in gauging the prospects of a company is the health of its entire industry. A company s stock price may go up or down depending on whether investors think its industry is growing or contracting. For example, a company may be doing well financially, but if its industry is declining, investors might question the company s ability to keep growing. In that case, the company s stock price might fall. Some industries are considered cyclical, meaning they expand and contract in cycles. For example, home building declines when interest rates rise. Consumer electronics typically do best at the end of the year, when many people buy these products as holiday gifts.

3 Economic Trends In addition to events surrounding a specific industry or company, investors may carefully watch various economic indicators general trends that signal changes in the economy. Signs that the economy is healthy and perhaps that most companies are making money include a rising Gross Domestic Product (GDP), low inflation, low interest rates, and low unemployment rates. When interest rates rise, for example, individuals, businesses and the government must pay more to borrow money. That means a business may put off plans to take a loan for a new project, thus needing fewer workers and buying less materials and services from other businesses. For individual consumers, their car or house payment could go up and interest rates on their credit cards rise, making it more expensive to buy on credit. Another measure of economic health is the Consumer Price Index (CPI) a measure of the cost of living: how much it costs to purchase the goods and services that an average household buys, such as food, clothing and fuel. When the cost of living rises, people spend more of their income on necessities and have less to spend on luxury items or investments, which is more bad news for the economy. When economic indicators point to a healthy and growing economy, companies are making money, the future looks good, and people have more money to invest. When this happens, stock prices on the whole generally rise, which is called a bull market. In contrast, when the economy is shrinking, businesses are not making as much money, people are losing jobs and therefore have less money left over after buying necessities, stock prices on the whole generally fall. This is known as a bear market. World and National Events National or world events can affect stock prices. When investors think a news event will be good for the economy, such as a federal tax cut, stock prices will likely go up. If news, such as massive layoffs, will mean an economic slowdown or uncertainty, stock prices generally drop. This effect can last for an hour, a day, several weeks or longer. How stocks trade? Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual, composed of a network of computers where trades are made electronically. The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. The primary market is where securities are created (by means of

4 an IPO) while, in the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies. The secondary market is what people are referring to when they talk about the stock market. It is important to understand that the trading of a company's stock does not directly involve that company. The Nasdaq The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the NYSE while all other second tier stocks traded on the other exchanges. The tech boom of the late '90s changed all this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle. This has resulted in the Nasdaq becoming a serious competitor to the NYSE. On the Nasdaq brokerages act as market makers for various stocks. A market maker provides continuous bid and ask prices within a prescribed percentage spread for shares for which they are designated to make a market. They may match up buyers and sellers directly but usually they will maintain an inventory of shares to meet demands of investors. The two other main financial hubs are London, home of the London Stock Exchange, and Hong Kong, home of the Hong Kong Stock Exchange. The last place worth mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq is an over-the-counter market, but the term commonly refers to small public companies that don t meet the listing requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to penny stocks because there is little to no regulation. This makes investing in an OTCBB stock very risky. Why Companies Issue Stock... If a company wants to grow maybe build more factories, hire more people, or develop new products it needs money. It could get a loan from a bank. But then it would owe money. By issuing stock, a company can raise money without going into debt. People who buy the stock are giving the company the money it needs to grow. Not every company can issue stock. A business owned by one person (a proprietorship) or a few people (a partnership) cannot issue stock. Only a business corporation can issue stock. A corporation has a special legal status. Like a school, its existence does not depend on the people who run it. Under the law it is separate from the people associated with it, and has special legal rights and responsibilities as well as its own unique name.

5 Introduction to CFD trading CFD is an agreement in a future contract whereby differences in settlement are made only through cash payments. It is an easiest method of settlement because losses and gains are paid by cash. Contracts for Differences (CFDs) are normally traded as over-the counter (OTC). CFD Trading gives you considerable benefits over conventional share dealing. A margin traded instrument, a Share CFD permits investors to get all of the advantages of having a stock without physically having the stock. To be clear, CFDs offers investors to speculate with all the advantages and risks owning a security without actually owning it in the equity market, treasuries, commodities, etc. Major advantages also include Gearing, Immediate dealing, Interest and Dividend Adjustments, etc. CFDs provide investors with the opportunity to take long or short positions. Unlike futures contracts, CFDs have no fixed expiry date or contract size. Trades are conducted on a leveraged basis with margins typically ranging from 1% to 20% of the notional value for CFDs on leading equities. CFD is considered as a derivative product where the investor gets earnings from changes in the prices of stocks and shares. For example, if we buy a CFD on a stock that is $10 and the price increases to $11, then our profit is the change in price. That is, if we bought 1000 CFDs, then our profit is $1000. Share or Index trading (including both buying and selling) through a CFD is almost identical to physical equity trade financed by a loan. Why the Value of CFDs Goes Up and Down A CFD gains or loses value as the difference between the price of the stock when you bought the CFD and the current price of the stock fluctuates. For example, if you buy a CFD that is based on a share of Microsoft (MSFT) stock, and the share of stock rises in value, the value of your CFD will also rise. Conversely, if you buy a CFD that is based on a share of MSFT stock, and the share of stock declines in value, the value of your CFD will also decline. The value of the CFD is directly tied to the price of the stock, which is why you must understand why stocks move before you invest in CFDs. Brief History of the CFD This degree of ownership, and the flexibility that comes with it, is one of the reasons why financial firms began offering CFDs in the late 1980s. At first, CFDs were only available to large corporations, but by the early 1990s, they became popular with hedge-fund traders who wanted to take advantage of the ups and downs of the market. By the end of the decade, CFDs became widely available in the U.K.

6 Over the last few years, CFDs have continued to grow in popularity, not only in the U.K. but in Australia, New Zealand, South Africa, Hong Kong, Singapore, and in numerous countries throughout Europe. Why CFD Trading? So what exactly are the benefits of CFD trading? (a) Trade on a Wide Variety of Financial Markets You can trade on a wide variety of financial markets with contracts for difference; CFD trading companies often offer thousands of markets to speculate on. From the leading stock market indices such as the FTSE 100 and the Dow Jones, to the forex rates such as USD/JPY or EUR/GBP, to the prices of commodities such as gold, oil or even sugar. (b) Long or Short; Speculate on Markets to go Up or Down CFD trading allows you to speculate on markets to both rise and fall. Think the FTSE is about to rally? Speculate on the index to go up. Think gold is over priced and about to drop in value? Trade on it to fall. (c) No Exchange of Assets Means Quicker Trades When investors trade CFDs, they are speculating on the future price and do not actually take ownership of any assets. Consequently, investors can usually trade CFDs far quicker than traditional share trading. (d) 24 Hour CFD Trading Just because the FTSE has closed for the day does not necessarily mean that you have to stop trading. Certain CFD trading companies offer investors the opportunity to trade 24 hours a day, five days a week, meaning no more waiting for the stock markets to open. (e) No Stamp Duty on CFD Trading Another advantage that CFD trading offers over more traditional forms of share trading is that it is exempt from stamp duty. This can help lower your trading costs. (f) Part Close Your CFD Trade When you are trading CFDs, you can part close a winning trade and bank a profit, however you can also part close a losing trade in order to limit your loss. Part closing

7 a CFD trade essentially means that you close one portion of your trade, however keep the rest of it open. This can be used to help lock in profits and restrict losses. (g) Hedge Other Investments As CFDs offer the ability to go short as easily as long, they can be used to provide insurance against price falls in an existing portfolio. For example, if you have a long-term portfolio that you wish to keep, but you feel that there is a short-term risk to the value of your investments, you could use CFDs to mitigate a short term loss by hedging your position. If the value of your portfolio falls the profit in the CFDs should offset these losses. (h) Place Stop Losses/Guaranteed Stop Losses on your CFD Trades Utilising stops losses is an important element in any trader s risk management strategy. A stop loss is an automated request to close your trade if the market on which you are speculating moves against you. You should however note that whilst a stop loss is not guaranteed, they can still help reduce losses. Be aware that, in particularly illiquid markets, certain financial instruments may gap, ie jump between two prices. If the market gaps then your stop loss order will be activated at the next traded price. A guaranteed stop loss works in a similar way a stop loss. However, should a market gap, your trade will still be closed at the price which you specified. As mentioned, there are risks associated with CFD trading. It is important that you realise that Contracts for Difference (CFD) and Financial Spread Trading carry a high level of risk to your capital and you can lose more than your initial investment. They may not be suitable for all investors, ensure you fully understand the risks involved and seek independent advice if necessary. CFD Trading Strategies CFD trading is an alternative and often a hedge to traditional investment; there are many ways that you can use it to increase your profits and limit your losses. Here is a list of some common strategies used in CFD trading. Examples are provided to further explain these CFD strategies. Going Long When you go long you are buying the right to purchase the stock at some point in the future, at its current price. If an investor believes that a stock will increase in value, they can purchase a long CFD and then exercise the CFD once the stock price has risen.

8 The CFD brokerage company will then pay them the difference between the new, higher stock price and the old lower stock price. This is basically the same as purchasing, holding and then selling shares. The only differences are that a CFD trader never actually owns any shares, they do not pay stamp duty and they purchase on a margin. They can therefore trade more shares, with less cash. Going Short This is the exact opposite of Going Long. CFDs were originally created to allow investors, especially large hedge fund managers, to bet on stocks that they thought would devalue. By purchasing a short CFD, you enter into a contract that forces the CFD broker to pay you the difference in share price if the shares go down in value. UNDERSTANDING RISK Trading any financial product is a skill (and some say an art), but even the best traders lose money. While CFD trading has its advantages, there is always a level of financial risk involved. That s why GFT recommends that traders of all levels: Understand the risks It is important to recognise that CFD trading carries inherent risks. Find ways to manage risks All your trades should be considered carefully and weighed in relation to your own trading strategy and risk appetite before execution. Before you trade a CFD, you should consider and anticipate the following risk factors. Volatility Sometimes, prices can move quickly and unexpectedly due to a number of factors, including major earnings announcements or material changes, market uncertainty or natural disasters. While volatility can provide trading opportunities, it can also bring significant risks. There is no way to avoid volatility in the market, but you can learn to manage the risks to your trading. Counterparty Whenever you trade with a financial dealer, you must consider the possibility that the other party may default on their obligation. You can limit this type of risk by investigating your dealer to make sure they are a well-established company that is

9 properly regulated everywhere they do business. Leverage Leverage can produce substantial profits as easily as it can cause substantial losses. When you trade, keep in mind that the leverage on your CFD is a significant risk factor that can magnify both positive and negative outcomes. Frequently Asked Questions about CFDs What does Contract value mean? Do I have to provide that? The contract value is the total value of all the stocks that you are betting on. So if a trader bets on 1,000 shares of a stock worth 250p, then the contract value would be 250,000p. CFD trading is almost always done on margin, so usually only about 10% of the contract value is required from the trader. What is an interest charge? An interest charge is something that people going long on a stock will have to pay for borrowing money. Because CFDs are made on margin the broker is lending the trader money, therefore the broker will charge the trader interest on this loan. On the other hand, if the CFD trader takes a short CFD position, then the broker will credit their account with the interest. When is interest charged? Interest is calculated and charged/credited daily, by taking the predetermined annual interest rate and dividing it by 365. What is a dividend charge? Dividend charges or credits are very similar to interest charges, because they are used to ensure that CFDs mirror the value of their underlying stocks. If a trader holds a long CFD on a stock during a dividend payment period, they will receive payment for that dividend on the ex-dividend date, from the brokerage company. If a trader holds a short position on a stock, they will be charged for the dividend on the ex-dividend date. The purpose of these adjustments is to compensate for the effects that dividends have on share price. Do CFD purchases fall under stamp duty taxes? One of the main advantages of CFDs is that they decrease transaction costs, while mirroring the share price. CFDs have less transaction costs because stamp duty does

10 not have to be paid on any trades. In addition they take into account dividends and interest rates, so in effect the CFD trader earns all the benefits of actually purchasing the stock, whilst not having to feel the burden of stamp duty taxes. Is there a limit to the amount of trades I make? CFD accounts are often used by day traders to allow them to make dozens of trades an hour, while keeping their transactions costs low by not paying stamp duty. In order to accommodate these customers, there is no limit to the amount of trades that CFD traders make. Are CFDs a good way to invest long term? Because of the fact that CFDs are traded on margin, and therefore traders are charged interest on their bets, they are not a profitable on a long term basis. If a long term investment is desired, then traditional investing is much cheaper because the 0.5% stamp duty on the purchase will be less than the interest expenses incurred by holding a CFD for a long period. What can I do to limit my risk when purchasing a CFD? The most important function that reduces the risk of a CFD is a stop loss function. This will ensure that once a pre-determined loss is reached, the trade will be closed and prevent any further loss from taking place. Other ways to limit risk are to bet on a smaller margin, such as 50% or 60%, and to make smaller bets. What markets can I trade CFDs on? There is an ever growing list of markets that CFD companies are offering. Currently most large cap stocks are available, as well as many indexes including the DAX 30, the FTSE 100, the NASDAQ, the NIKKEI, the DOW, the NYSE 100, and the S&P 500. What obligations, relating to purchasing or selling the underlying shares, do I have when I exercise a CFD? CFDs will mirror the complete value of the underlying share, but the trader will have absolutely no obligations relating to these shares. Dissimilar to options and warrants, it is never necessary to purchase any shares in order to close a position in a CFD. Can I trade CFDs when the markets are closed? Many CFD brokerages have begun to allow after-market trading, to suit their private investor clients who prefer to do their trading after work. This function, along with

11 the automatic sell and guaranteed stop loss functions, makes it possible for investors to actively manage their CFD accounts.

A stock is a share in the ownership of a company. Stock represents a claim on the company s assets and earnings.

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