Guide to Contracts for Difference (CFDs) www.templetonsecurities.com
What are CFDs? How do CFDs work? A CFD (Contract for Difference) is an arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities. CFDs are a way of trading share price movements without physically owning the share itself. You simply own a contract which you buy at one price and sell at another, making (or paying out) the difference hence the name, Contracts For Differences. CFD trading is a commonly used financial tool that is popular with investors because it affords them the ability to purchase the right to buy or sell a contracted amount of shares in a given stock at a certain price, for a predetermined period of time. There are many new terms to learn when you re finding out more about CFDs, so to help you learn them our guide includes some simple definitions and examples. Why trade CFDs? Did you know that by buying or selling CFDs you can: So how does CFD trading differ from conventional share dealing? One of the main advantages is that you don t need to deposit the full value of the shares purchased, instead you only need to pay a percentage of that (known as the Notional Trading Requirement or NTR) up front. For example an index CFD the NTR starts from 5%. That means you could open a 20,000 position and you only need to provide 1,000 initially this is known as your initial margin. With margin trading interest is paid or received on your position. As CFDs are a leveraged product it is important to understand how margin trading works as it can easily work against you and while profits can be magnified, so too can losses. Therefore, you can lose more than your initial deposit. It is not suitable for everyone, so ensure you fully understand the risks and if in doubt, seek independent advice. Trading CFDs differs from conventional share trading, so you need to get to know how they work and their features. So before trading you need to understand: What markets can you trade CFDs on The impact of Dividends and Corporate Actions on your positions How to make money when you believe prices will rise (Long position) Different types of CFDs Equities You can trade CFDs on equities listed on the major UK, US and European stock exchanges. There are thousands to choose from and trading hours match the underlying market. Indices You can also trade CFDs on the major world indices. Both equities and indices work in similar ways and are quoted and traded in the underlying currency. How to make money when you believe prices will fall (Short position) How Margin works The Charges which will apply Your maximum exposure and the risks involved Currencies You can trade CFDs on a wide range of currencies from Euros/Yen to Australian/US dollars. Precious Metals You can trade CFDs on most major commodities including gold, silver and platinum. Dividends and Corporate Actions Trade equities listed on the major UK, US and European stock exchanges, as well as currencies, indices and commodities. Still benefit from Dividends and Corporate Actions and, as you never own any actual shares, there s currently no UK Stamp Duty to pay on purchases saving you 0.5% on UK equity purchases. Trade on margin, as low as 5% of the purchase price to maximise trading capital. Profit from falling or rising markets by trading long or short. You can limit and manage your risk using Stop Loss and Limit Order facilities. Dividends A dividend adjustment is credited to long positions and debited from short positions held at close of business on the day before the ex-dividend date. Payment is credited or debited to your margin account on the ex-dividend date. Please note, dividends on UK equities will be paid or received at 90% of the dividend amount. Corporate Actions CFD positions will be adjusted in the event of a corporate action, for example a rights issue. The adjustment will be to replicate the corporate action on the underlying equity. If this is not possible then an equivalent cash adjustment may be made. This will apply to positions held at the close of business on the preceding business day to the corporate action date. 2 3
Trading Strategies - Long Trading Strategies - Short Trade long if you believe prices will rise. When you believe a share price or an index is going to rise you could buy the relevant CFD and you ll make a profit if it goes up, but a loss if it goes down. This is known as a long position. Follow the example below which is based on an equity CFD to see how it works: What happens if the price of XYZ plc goes up to 1000p in two weeks time? What happens if the price of XYZ goes down to 700p in two weeks time? Opening value: 8,500 Opening value: 8,500 Closing value: 10,000 Closing value: 7,000 Profit on trade: 1,500 Loss on trade: 1,500 Trade short if you believe prices will fall. One of the best features of CFDs is that you can still make money even if you think a share price or index is going to fall by taking a short position. Going short means selling something at a high price, with a view to buying it back at a lower price to make a profit. Follow the example below to see how it works: What happens if the price of XYZ plc goes down to 700p? What happens if the price of XYZ goes up to 1000p? Opening value: 8,500 Opening value: 8,500 Closing value: 7,000 Closing value: 10,000 Price of XYZ plc CFDs 850p Closing commission @ 0.5%: 50 Closing commission @ 0.5%: 35 Price of XYZ plc CFDs 850p Profit on trade: 1,500 Loss on trade: 1,500 Number of CFDs purchased 1000 Notional Value of CFDs 8,500 Financing charge @ 2.5% +/- LIBOR per annum = 9.80 (3% x 8500 = 255/365 = 0.6986 x 14 days = 9.78) Financing charge @ 2.5% +/- LIBOR per annum = 9.80 (3% x 8500 = 255/365 = 0.6986 x 14 days = 9.78) Number of CFDs sold 1000 Notional Value of CFDs 8,500 Closing commission @ 0.5%: 35 Closing commission @ 0.5%: 50 Commission @ 0.5% 42.50 Margin (NTR is 10%) 854.25 Overall Profit: 1397.72 ( 1,500-42.50-50 - 9.78) Overall Loss: 1587.28 ( 1,500-42.50-35 - 9.78) Commission @ 0.5% 42.50 Margin (NTR is 10%) 854.25 Overall Profit: 1397.72 ( 1,500-42.50-35) Overall Loss: 1592.50 ( 1,500-42.50-35) We develop long-term relationships with our clients based on transparency, trust and integrity A dedicated independent broker providing the market insight and investment advice that clients trust www.templetonsecurities.com 4 5
Margin and Payments If you hold an open CFD position, you may need to make an additional margin payment. Our Terms and Conditions covers this in detail and you should make sure you re happy with how margin payments work before buying or selling a CFD. Here s an example as a guide: Price of XYZ plc CFD 1043p Number of CFDs 1000 Notional value of CFDs 10,430.00 Commission @ 0.5% 52.15 Margin (NTR is 10%) 1,043.00 Value of CFD at end of day 1 8,570.00 Margin required (NTR is 10%): 857.00 In this example the Notional Trading Requirement (NTR) is 10%. This means you need to provide an initial margin of 1,043 to your margin account. At the end of day 1 the price of the CFD has fallen to close at 857p so the value of the CFDs would fall to 8,570.00, meaning you are losing 1,860.00. This loss is deducted from your margin account, but since it only holds 1,043.00, you d need to pay another 817.00 to cover the loss. Important points to note with regards to margin calls: Please be aware that each individual position you hold has a Notional Trading Requirement (NTR). You must maintain the NTR percentage, in addition to any losses on the CFD. Failure to pay margin calls may result in positions being closed and you will be liable for any outstanding losses. If you are going on holiday or will be away from your normal contact details whilst running open positions, it is important that we are able to contact you in the event of any margin calls. 6 7
Trading Costs CFDs also hold the advantage that they are not subject to a number of costs that traditional stocks are subject to: Maximum loss on a long CFD Maximum loss on a short CFD Custodian Fees CFDs are not subject to yearly custodian fees or crossboard transfer fees but are a faster and more convenient way to trade than physical stocks. No Stamp Duty As you are not physically buying stock, profits from CFDs in many countries, are currently not subject to the same taxation as profits from stocks. This is one of the major contributing factors to the popularity of CFDs in some countries. Understanding the Risks Magnify Dividends as well as Price Movements If you hold a long CFD position on Ex-Dividend Day, you receive dividends for that CFD in the same way as if you held the stock. So, when leveraging you stock investment on margin, you magnify dividend payments as well as price swings for the stock. Overnight interest on CFD positions CFD positions closed before the end of day on an exchange are not subject to overnight financing charges making CFDs more suited to intra-day trading. For full details of our commission rates and charges, please see enclosed Commision Rate Card. The maximum loss on a long CFD is the notional value of CFDs you ve bought. Getting started Opening an account is easy. Just complete an Application Form and return it to us. You may need to send additional documentation but we ll advise you if anything else is needed. Once your application has been approved we will open an account for you and, when sufficient funds have been deposited, you can begin CFD trading online or by telephone. For a short CFD, there is no limit to the amount of money you could lose if the price continued to rise, so the key to CFD trading is to know how much you re prepared to lose, and how to use all the features of the product to help protect you against losses you cannot afford. See Stop Losses and Limits. You can potentially enjoy big returns trading in CFDs; however, not without their fair share of risks and are often associated with a greater risk profile than many other tradable instruments. By virtue of employing leverage, losses are multiplied in equal proportion to upside gains. Consequently, traders are not automatically limited in liability to their investment and often additional deposits are required to cover margin requirements to prevent early closures of otherwise profitable positions, and without due prudence and caution, losses can become significant. Nevertheless, CFDs offer traders a flexible alternative to other trading instruments. Once the basics are understood, they can prove a valuable additional tool in building a sustainable and profitable trading portfolio. Therefore, please remember: You can lose more money than you invest and you may need to make further deposits at short notice if your positions move against you. CFDs are not suitable for everyone so make sure you understand the risks. You should understand what you are getting into by reading our Risk Warning Notice. Please seek independent advice if necessary. A CFD is an open-ended contract with no specified closing date. If your CFD is not performing as you had hoped, you can keep it open if you think the position will recover, so long as you can afford to keep financing the contract. Trading online Simply visit: www.templetonsecurities.com then select account log in found under the personal section. If you are unclear about anything, simply call one of our CFD brokers. Trading by phone To place a CFD trade by phone call: 0207 448 9834 or 0207 448 9815 Please Note: All calls are recorded for your security. You can e-mail us at: cfds@templetonsecurities.com 8 9
Managing your account There are a couple of simple precautions you can take to help keep your CFD portfolio in order: Always check your contract notes and statements for discrepancies, so they can be reported immediately. It s wise to keep a written record of all trades to enable us to investigate any query. If any of your personal details change (including contact details), please let us know immediately so that we can up date your records and ensure the advice we provide to you, is suitable. Glossary of Terms Stop Sell You would use this type of order if you want to sell below the current market price. Most commonly used if you have a long position, as you may want to limit your exposure by selling out if the price falls to a pre-determined level. However this order could also be used to open a short position. Stop Buy If you have a short position, you may want to limit your exposure by buying in if the price rises to a predetermined level. To do this you would use a Stop Buy order. You could also use this order type to open a long position when the price rises to a pre-determined level. Limit Buy This order type can be used to both establish a new position as well as realise a profit from an existing position. A Limit Buy allows you to buy below the current market price and is useful to close profitable short positions or open long positions once the price has fallen. Guaranteed Stops You can also choose to limit the risk on CFDs by using a Guaranteed Stop order. This means that the stop loss you place is guaranteed to be executed at exactly the price specified. For example, if the current price is 742 and you placed a stop loss at 740 but the next available price in the market was 735, your order would still be executed at 740. There is a Premium Payable for this service at the time of opening the trade. Please note that this feature is only available on certain CFDs. Linked Order A combination of two orders (a stop order and a limit order). If one goes through the other is cancelled or if you close the position both orders will be cancelled. GFTD Good for the day orders a limit order which only runs for one business day. At the end of the day, if the order hasn t been executed, it is cancelled. GTC Risk Warning Please be aware that the price and value of all investments and their income can fluctuate and you may get back less than the amount you invested. Trading CFDs carries a higher level of risk and you can lose more than your initial deposit. It is not suitable for everyone, so ensure you fully understand the risks and if in doubt, seek independent advice. The performance of an investment in the past is not a guide to how it will perform in the future. Our Complaints Procedure At Templeton, we are committed to providing a high standard of service to all our clients however; we do recognise that occasionally we might not live up to your expectations. Your comments are important to us as they allow us to improve our service to you and in general. Compliance Department Templeton Securities Limited 50 Fenchurch Street, London, EC3M 3JY Please ensure you read our Risk Warnings before you invest. The rules on taxation can change. Please be aware that Templeton Securities is not a legal or tax adviser and therefore are not able to provide you with legal or tax advice. The value of any tax benefits will depend on your tax position. If you require advice, you should consult with an independent financial adviser. We have an established internal complaints procedure to ensure a complaint is dealt with efficiently. Therefore, should you have any concerns regarding our services, or simply wish to contact our customer relations, please contact us at: Email: legal-compliance@templetonsecurities.com Telephone: 0207 448 9801 Limit Sell If you want to sell short at a pre-determined level set by you, but only when the price is higher than the current price, you would use a Limit Sell order. You would also use this order type to close out a profitable long position. Good until cancelled orders a limit order which you place once, to run until you either cancel it or change it. 10 11
12 Templeton Securities Limited, 50 Fenchurch Street, London, EC3M 3JY E: info@templetonsecurities.com www.templetonsecurities.com May 2015