A Contract for Difference (CFD) is an agreement between two parties to settle, in cash, the difference between the opening and closing prices of a particular instrument. As a result, CFDs simulate the price performance of various financial instruments, without the need for the trader to physically own the assets, and do not involve settlement of the physical financial instrument.
CFDs are priced almost identically to their underlying instruments (e.g. a share, index or currency) and are typically quoted on a Spot basis.
When buying a CFD contract, you do not actually own the underlying asset. However, you are entitled to some of the benefits, such as dividends, rights issues etc, as if you were an owner of the underlying asset. The only difference is that you will not receive any voting rights on equities.
When you are holding a "long" position on an equity CFD, you will receive a credit adjustment in your trading account if a dividend is issued on the physical share. The adjustment is equivalent to the net dividend payment due on the underlying shares. On the other hand, if you are holding a "short" position on an equity CFD, there will be a debit adjustment which is equivalent to the gross dividend. Other corporation actions such as bonuses and stock splits will also be adjusted according to the underlying shares.
Spread Co does not charge commissions on trades. All the trading charges are incorporated within the spreads that you trade at. Additional charges are made when you hold a long position open overnight. This is a financing charge to hold the position open. In reverse, you will receive a credit for short positions held open overnight.
For each of your open CFD positions (trades), Spread Co will require you to dedicate trading resources equal to a percentage of the position size. This funding is called a margin requirement.
Because you do not have to pay the full amount of your position size, CFDs enable you to increase the amount of exposure to an instrument through leverage. This means you can trade a larger position than if you traded using simply the funds you placed in your account. Leverage has the effect of magnifying the profits or losses on your trading capital. The maximum amount of leverage available to you varies with the instrument you are trading.
The margin requirement for a position is calculated by multiplying the relevant CFD position size by the applicable margin rate:
Margin requirement = (position size) x (margin rate)
e.g. If the margin rate for Microsoft (MSFT) is 5% and you buy 100 MSFT at $25.00, then the position size is $2500 and the margin requirement ($2500 x 5%) is $125.
The initial margin rates are 1% for FX, 1% for Indices, 1% for bullion, 3% for commodities and 5% for equities.
A margin call occurs when there is insufficient funding in your account to cover your open positions with the necessary margin. This happens if your account valuation falls below the margin requirement.
You will be emailed every four hours to inform you that you are on margin call. However please note, margin call emails are not sent out of market hours.
If you are on a margin call, you must top up your account with money or close some of your open positions so as to reduce the level of your margin requirements to the level of your available funds.
If you don't top up your account, one or more of your positions will be closed in order to bring the margin level in your account up to the required level for the remaining open positions.
No. CFDs are cash settled.
There are two main ways in which you can profit from trading in CFDs:
- Buy at one price then sell at a higher price
- Sell at one price then buy at a lower price
The two main ways to lose while trading in CFDs are to:
- Buy at one price then sell at a lower price
- Sell at one price then buy at a higher price
Liquidation is the forced closure or reduction of your open positions. Liquidation occurs when your resources fall significantly below the level required to maintain your margin requirements.
Your trading account is subjected to liquidation process if account valuation falls below a percentage of the margin requirement (liquidation level) which is required to support your open positions.
The open positions with the largest margin requirement will be liquidated first.
For consolidated positions accounts, the liquidation engine will cut the open position with the largest margin requirement. A liquidation trade will be inserted to close the open position at market price. Positions will be automatically matched based on a FIFO basis.
For single positions accounts, the liquidation engine will create a new liquidation trade thereby reducing the open position to zero and the open position is simply added to the open position list on the open position blotter. Open positions which create zero exposure are not matched. This is left to the discretion of the position holders. The fundamental purpose of Single Position accounts is to allow the position holders to manually select the open positions he wants to take profits/losses on as opposed to the trading platform automatically matching corresponding open positions in the same instrument.
No you will not be charged extra if you get liquidated. You will be subjected to the normal cost of trading CFDs which is spreads in this case.
The liquidation process will stop only when account equity is more than the margin requirement.
The minimum account maintenance balance is US$100.
Yes your open positions are marked-to market with real time mid prices.
Open profit/losses is the real time value of the profit/losses on open positions.
Closed profit/loss is the day´s realised profit/losses.
For single positions accounts, each trade can be treated as an individual open position. When buy and sell trades in a single instrument are created, all positions are kept open and will not be netted off until the client manually closes such open position or nets it off.
Consolidated account open positions are automatically netted off against each other. Therefore profit/loss will be realised when an opposite trade to an open position is executed. This is suitable for clients who trade a single instrument frequently.
Matching is only available if you have a single positions account. The fundamental purpose of single position accounts is to allow position holder to manually select the open positions he wants to take profits/losses on as opposed to the trading platform automatically matching corresponding open positions in the same instrument. The act of manually selecting trades to close off against each other is called matching.
Unmatched profit/loss is only applicable to a single positions account and it is the accumulated marked-to-market profit/loss for unmatched open positions. These unmatched open positions are marked against the previous day´s closing prices.
Matching is only available if you have a single positions account. When you match your positions, you would have officially ´closed´ a position. After the end of day process (which will happen at 10.30pm London time), your unmatched profit/losses will be added (or less off) from your cash balance.
Matching is only available if you have a single positions account. You can match your positions by clicking on ´match´ in the ´open positions´ panel in the trading platform.
Your cash balance displays the aggregate of the brought forward cash balance and the day´s commission +/- the days realised finance charges.
Trading resources shows the funds that are available for entering into additional positions. It
is the difference between account valuation minus margin requirement.
Account valuation is the aggregate of cash balance + open profit/loss + closed profit/loss.
An average price is the price at which the position was created.
Example of average price calculation
Customer A did 3 USDJPY trades on Day 1:
- Trade 1: Buy 200,000 USDJPY @ 110.50
- Trade 2: Buy 100,000 USDJPY @ 110.40
- Trade 3: Sell 100,000 USDJPY @ 110.60
Based on an absolute volume-weighted average calculation, the average price is 110.50, represented by the calculation: [200,000 x 110.50 + 100,000 x 110.40 + 100,000 x 110.60]/400,000
An initial price is the average price of which your trades were executed for the relevant day
for a particular market or marked-to-market price if the position is brought forward from the
previous trading day.
Example of initial price calculation
Customer A did 3 USDJPY trades on Day 1 and market closed at 110.70:
- Trade 1: Buy 200,000 USDJPY @ 110.50
- Trade 2: Buy 100,000 USDJPY @ 110.40
- Trade 3: Sell 100,000 USDJPY @ 110.60
Based on an absolute volume-weighted average calculation, the average price is 110.50, represented by the calculation: [200,000 x 110.50 + 100,000 x 110.40 + 100,000 x 110.60]/400,000
On Day 2, Customer A will see the open position of USDJPY* being rolled over, with the Day Open Price indicated as 110.70. (Average Price remains unchanged)
- Trade 1: Buy 200,000 USDJPY @ 110.50
- Trade 2: Buy 100,000 USDJPY @ 110.40
- Trade 3: Sell 100,000 USDJPY @ 110.60
All of the above positions will not be closed or net off at end of the day. Customer A will see the exact positions listed on the Open Position panel until he close or match it manually
Day profit/loss displays the real-time unrealised profit/loss of your open trades based on the Initial Price (The difference between Current Price and Initial Price multiplied by Quantity). The Profits or Losses are expressed in your account currency.
Total profit/loss displays the real-time unrealised profit/loss of your open trades based on the average price (The difference between Current Price and Average Price multiplied by Quantity). The Profits or Losses are expressed in your account currency.
