Can anyone trade CFDs?
No, CFDs are only suitable for investors with sufficient experience and knowledge. Experienced private investors will be opted up to intermediate customer classification pursuant to the rules of the Financial Services Authority. CFDs are traded principal-to-principal with no centralised market quote. As such, they are deemed to be off-exchange or over-the-counter (OTC) products and are not specifically covered by any stock exchange rules.

Who regulates CFDs?
CFDs are regulated in the UK by the Financial Services Authority (FSA) in accordance with the Financial Services and Markets Act 2000. All CFD transactions are reported daily to the FSA and regulated firms must have sufficient financial resources to support the volume of their CFD trading at all times.

What are the costs?
Commission is charged on a per trade basis as a percentage of the total contract value. There are no hidden costs and you deal at the market price.

What is financing the position?
Clients pay interest on the contract value of a long CFD. Interest is charged at a percentage over LIBOR (London Interbank Offered Rate, linked to base rates). Clients holding short CFD contracts receive interest on the cash that the sale of the underlying stock would have generated.

What is the transaction price?
The price at which an equity CFD trades is normally that of the underlying equity and is subject to the normal market conditions at the time of trade. For example, the price may be different when dealing in 1,000 as opposed to 100,000 shares.

How about with corporate actions?
You will receive all the benefits of any corporate action on the underlying share. These transactional benefits may be substituted by an equivalent cash sum, which will be credited or debited to your account on the next business day.

How do I secure the transaction?
With the majority of derivative transactions the settlement period can be several weeks from the time of trade. In order to protect the integrity of the market, clients are required to secure their positions by posting margin. CFDs do not have predetermined settlement dates and require a collateral deposit to cover potential liabilities.

What is marking to market?
Marking to market is a daily adjustment to the margin requirement based on the movement in the value of the underlying asset. Any shortfalls in margin must be covered immediately.

What are the risks?
There is no way of knowing for sure the direction of the prices of CFDs in advance. Therefore, like many investments, CFDs carry a risk that market prices may go in the opposite direction of the view held. They also offer you a high degree of leverage; using a small deposit (margin) you can control a much larger position. This can dramatically magnify your profits but also your losses and if not managed prudently can lead to the loss of more than your initial investment. Your exposure to risk can be reduced by placing stop-losses and we recommend that you use these on each trade.

Do I receive Dividends?
Following a purchase of an equity holding, you are entitled to receive any dividends paid by that company. Although you are not the beneficial owner of the shares, as the holder of a long CFD position you are entitled to receive a cash sum similar to any dividend declared by the company while the position is held open (less any tax or administration charges). Conversely, if you are the holder of a short CFD, you are required to pay a sum equal to the gross dividend, even though you do not own the underlying stock. The deciding date for the entitlement to a dividend is the same as the ex-dividend date declared by the relevant company. You are advised to check the dates of any impending dividends before entering into CFD positions.

How does margin work?
As a holder of a long or short CFD you do not pay the full underlying value of the contract. Instead, you are required to deposit funds (or stock) as collateral known as initial margin. Initial margin is calculated as a percentage of the full contract value and the rate varies according to the market capitalisation and volatility of a particular share. For example if the initial margin is set at 10% you can go long or short of a CFD worth £100,000 and deposit just £10,000, gaining ten times leverage. Cleared funds in excess of the margin requirement are usually required prior to dealing.

What about statements?
You will receive full contract notes every time you trade a CFD and an account statement every week. These are automatically sent by email to you. They are user friendly and easy to understand.

What about Voting Rights?
CFDs on individual equity shares are non-deliverable and carry no voting rights.

What are capital adjustments?
Just as a CFD position reflects the exposure of either a purchaser or seller of shares in an underlying company, so it will also reflect any capital adjustments or benefits announced by the company. Applying the same formula used by the relevant exchange, CFD terms will be altered to reflect any capital adjustment. Any alteration will be on such terms as deemed to be fair and equitable to both parties to the transaction. Capital adjustments covered include bonus, rights and warrant issues, and amalgamation and sub-divisions of share capital.