What is a CFD? A CFD is an agreement to exchange the difference between the opening and closing prices of the share, index or commodity between the time at which a contract is opened and the time at which it is closed. How do CFDs work? CFD trading is similar to traditional share dealing, with a few exceptions. Margin trading starts at 5% Trading on margin enables you to buy or sell a share at only a percentage of the overall cost. For example, if you buy or sell a share with a 5% margin requirement, you only have to deposit 5% of the overall value of the trade. This flexibility means you could take a position of 10,000 in the underlying equity with a deposit of 500. Consequently, a small percentage price change in the underlying equity can result in a large percentage gain or loss on the margin required to open the CFD. No Stamp Duty A CFD is a derivative product, and as such there is currently no stamp duty to pay when you trade CFDs on UK equities. No fixed expiry date Because CFDs have no fixed expiry date, you can close your position when market conditions are most conducive to you doing so. As long as you keep positions open, your account will be credited or debited in line with interest and dividend adjustments. Buying CFDs When you buy CFDs, you receive dividends on the contracts you have bought and you pay interest on the position. This is similar to the effect of buying traditional shares, where you do not receive interest on the cost of the shares but you do receive dividends. Selling CFDs When you sell CFDs, you receive interest on the contracts you have sold but you do not receive dividends. This is similar to the effect of selling traditional shares, where you receive interest on the income of the sale and cease receiving dividends. The interest rates applicable on the purchase and sale of CFDs can fluctuate. Therefore, these interest rates will be set out in detail when you open an account. 1
TAKE Advantage Priority Dealing You can trade CFDs on real time prices in seconds as the opportunities present themselves. You can take a global view of your finances, both in terms of the currencies you can fund your account with, as well as the breadth of international markets where you can trade CFDs. Trading accounts can be held in Sterling, US Dollars or Euros. Equity CFDs can be traded on UK, US, European and Asian Markets. Limit Orders Limit orders enable you to buy or sell a CFD automatically if the share reaches the price you specify. Stop Orders Stop orders enable you to cap a loss or take your profit by automatically closing a position if the underlying price falls or rises to the level you specify. One-Cancels-the-Other (OCO) This is a combination of a limit and a stop order. When one order is triggered, the other linked order is automatically cancelled. Guaranteed Stops Guaranteed Stops allow you to limit the risk you carry on each trade. You can guarantee that your position will be closed promptly at the stop level you specify, even if the market moves sharply against you, for which there is an additional cost of 0.3% of the value of the trade. CFD SIPP Accounts When you trade CFDs with SVS, you have access to all the benefits of CFD trading on shares with a SIPP wrapper. A SIPP (Self Invested Personal Pension) provides significant tax relief, similar to approved pension schemes, but with the flexibility to buy and sell investment products in line with your own trading strategy. Trading on margin Trading CFDs on margin is an efficient way to take larger market positions than normally available to traditional share traders, as you deposit only a fraction of the total cost of the contract instead of the entire amount. 2
long equity cfd example On 25th September, you take the view that BT Group is going to rally. The share is quoted at 257.25p (Bid price) to 257.50p (Offer price), and you decide to buy 10,000 shares as a CFD at 257.50p. BT Group Share Price 257.50p Number of CFDs 10,000 BT Group Contract Value 25,750 Stamp Duty ZERO Notional Trading Requirement (NTR) 1,287.5 When you buy CFDs, you need only supply a deposit of 5%, as a minimum, ( 1,287.5) of the full value of the shares (257.50 X 10,000 = 25,750). Financing the Trade To hold a long position overnight, you will incur a financing charge based on LIBOR* (4.75% + 2.5% = 7.25%) multiplied by the daily closing value of the BT Group (258p) which is 25,800 (10,000 shares multiplied by 258p) and then divided by 365 days. *London Interbank Offered Rate Financing the trade LIBOR* (4.75% + 2.5% = 7.25%) 7.25% BT Group Closing Value (10,000 X 258p) 25.800 Price for one day ( 5.12) Financing for this day is 5.12 ( 25,800 X 7.25% / 365 days), debited from your account on the next trading day. Closing the position By 29th September the BT Group share price has gone up to 265.25p (Bid Price) to 265.50p (Offer Price) and you decide to close your position and take your profits. You therefore decide to sell 10,000 shares at 265.25p. CLosing the position BT Group Share Price 265.25p Number of CFDs 10,000 Working out the Profit & Loss Your profit on the trade is calculated as follows: Working out the Profit & Loss BT Group Opening Contract Value 25,750 BT Group Closing Contract Value 26,525 Profit on Trade 775 Financing (4 days) ( 20.48) Overall Profit on Trade ( 775-20.48) 754.52 3
short equity cfd example On 2nd October, you decide that GlaxoSmithKline is overvalued. The share is quoted at 1431p (Bid Price) to 1432p (Offer Price), and you decide to sell 2,000 shares as a CFD at 1431p. GlaxoSmithKline Share Price 1431p Number of CFDs 2,000 GSK Contract Value 28,620 Stamp Duty ZERO Notional Trading Requirement (NTR) 1,431 When you sell CFDs, you need only supply a deposit of 5%, as a minimum, ( 1,431) of the full value of the shares (1431 X 2,000 = 28,620). Financing the Trade Because you have taken a short position, your account will receive a credit based on LIBOR* (4.75% 2.5% = 2.25%) multiplied by the daily closing value of GlaxoSmithKline (1440p) which amounts to 28,800 (2,000 shares multiplied by 1440p) and then divided by 365 days. *London Interbank Offered Rate Financing the trade LIBOR* (4.75% - 2.5% = 2.25%) 2.25% GSK Closing Contract Value (2,000 X 1440p) 28,800 Price for one day ( 1.78) Credit for this day is 1.78 ( 28,800 X 2.25% / 365 days), credited to your account on the next trading day. Closing the position By 10th October, the GlaxoSmithKline share price has gone up to 1469p (Bid Price) to 1470p (Offer Price) and you decide to close your position and limit your loss. You therefore decide to buy 2,000 shares at 1470p. Closing the position GlaxoSmithKline Share Price 1470p Number of CFDs 2,000 GSK Contract Value 29,400 Working out the Profit & Loss Your loss on the trade is calculated as follows: Working out the profit & loss GlaxoSmithKline Opening Contract Value 28,620 GlaxoSmithKline Closing Contract Value 29,400 Loss on Trade ( 780) Financing (8 days) 14.24 Overall Loss on Trade ( 780-14.24) 765.76 4
Share index cfds Share Index CFDs are ideal instruments to trade if you believe there is more potential for movement in the entire market in a specific direction than any particular share. If you believe a specific market is set to rise, then you might decide to go long (buy) on a share index CFD. However, if you believe a specific market is set to fall, you might decide to go short (sell) on a share index CFD. Index CFDs carry the same benefits as regular CFDs, allowing investors to: Seek profit from rising and falling markets Trade a wide range of markets Trade on competitive rates Pay no Stamp Duty Trade on transparent prices Collect dividends Trade without expiry restrictions Hedging Selling Index CFDs can offer holders of long-only equity portfolios a way of hedging against short-term dips in the market that could potentially reduce the value of the shares they hold. This can negate the need to sell the shares you own and then buy them back once the market has bottomed out and started to move up again. Pairs Trading with Index CFDs A pairs trader might go long on the Dow Jones and sell short the French CAC 40, in anticipation that the US stockmarket will outperform the French stockmarket. Pairs trading is trading the relationship between two indices, shares or sectors. As with other CFDs, you can go both long or short on a share index CFD, which has no fixed maturity date and can be closed out when you choose. 5
Seek Potential Investors can seek potential for movement in an entire market with Index CFDs 15 6
long share index cfd example Opening the Position On 2nd October, you believe that the FTSE 100 is going to rally. The index is quoted at 6002 (Bid Price) and 6004 (Offer Price), and you decide to buy one lot (each lot has a tick value of 10 per point movement) at 6004. FTSE 100 Index CFD Price 6004 Number of Lots 1 FTSE 100 Contract Value 60,040 Margin Requirement 2,000 Financing the Trade When you hold a long position overnight, your account will incur a financing charge based on LIBOR* (4.75% + 2.5% = 7.25%) multiplied by the daily closing value of the FTSE 100 (6004) which amounts to 60,040, divided by 365 days. *London Interbank Offered Rate Financing the trade LIBOR* (4.75% + 2.5% = 7.25%) 7.25% FTSE 100 Opening Contract Value (6004 X 10) 60,040 Price for one day ( 11.93) Financing for this day is 11.93 (10 X 6004 X 7.25% / 365), debited from your account on the next trading day. Closing the Position By 9th October, the FTSE 100 has risen to 6035 (Bid Price) and 6037 (Offer Price) and you decide to close your position and take your profit. You therefore decide to sell 1 lot at 6035. Closing the position Price of FTSE 100 CFD 6035 Number of Lots 1 Value of Contract 60,350 Working out the Profit & Loss Your profit on the trade is calculated as follows: Working out the profit & Loss Opening Value of Contract 60,040 Closing Value of Contract 60,350 Profit on Trade 310 Financing (7 days) ( 83.51) Overall Profit on Trade ( 310-83.51) 226.49 7
Risk warning This financial promotion has been approved and issued by SVS Securities Plc ( SVS ), a firm authorised and regulated by the Financial Services Authority (FSA). SVS Securities Plc is a Member of the London Stock Exchange and a Member of the PLUS Markets Group (formerly OFEX). SVS Securities Plc is registered in England and Wales and the Company Number is 4402606. Any material contained herein is intended for intermediate customers only and has been prepared for informational purposes without regard to any particular user s investment objectives, financial situation, or means, and SVS is not soliciting any action based upon it. This material is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument. Although this material is based upon information that SVS considers reliable and endeavours to keep current, SVS has not verified this information and does not represent that this material is accurate, current or complete and it should not be relied upon as such. Trading in Contracts for Difference (CFDs) carries a high degree of risk. Prices may change quickly and may go down as well as up. Past performance is no guarantee of future success. Investors should carefully consider their own personal financial circumstances before dealing in CFDs. CFDs contracts can only be settled in cash. Investing in CFDs carries the same risks as investing in futures or options. Transactions in CFDs may also have a contingent liability. Contingent liability investment transactions, which are margined, require investors to make a series of payments against the purchase price, instead of paying the whole purchase price immediately. Investors may sustain a total loss of the margin deposited with SVS to establish or maintain a position. If the market moves against an investor, the investor may be called upon to pay substantial additional margin at short notice to maintain the position. If an investor fails to do so within the time required, the investor s position may be liquidated at a loss and the investor will be responsible for the resulting deficit. This communication shall not represent an agreement to transfer title of securities. 8