How CFDs work

A Share CFD is an undated contract that captures every aspect of share trading, except that you don't have to put up the full contract value. A Contract for Difference (CFD) is simply an agreement to exchange the difference in value of a particular share, indices, commodity, precious metals or treasuries etc between the time at which a contract is opened and the time at which it is closed. CFD trading is very similar to normal share dealing. You deal at the cash price of the share, and pay a commission which is calculated as a percentage of the value of the transaction.

Share CFDs have no fixed expiry date, giving you the freedom to close your position when you choose. You open and close your position at the actual market price, and while your position remains open your account is debited or credited to reflect interest and dividend adjustments.

Some other markets offererd, such as Gold or Oil, are Expiry Transactions. These have a fixed expiry date (specific to each market) and if you have not closed such a position by its expiry date, it will automatically close.

Interest and dividend adjustments

Contracts for Difference (CFDs) are designed to reflect as closely as possible an actual share trade. So while your position is open you pay or receive daily interest adjustments depending on whether you have a long or a short position.

Long positions

Your account is debited to reflect interest adjustments and credited to reflect any dividends. This mirrors the effect of buying shares in the normal way, where you no longer earn interest on the funds used to buy the shares, but receive dividends instead.

Short positions

Your account is credited with interest adjustments and debited to reflect any dividends. This mirrors the effect of selling shares, where you earn interest on the proceeds of the sale, but cease to receive dividends.

The interest rates are highly competitive, based on the inter-bank offered rate for the currency that the trade is denominated in, plus/minus 2.5%. If you choose to go short, you may also be charged a borrowing fee, which will be included in the interest adjustment applied to your position. Dividend adjustments are applied if you have an open position in a share on the ex-dividend date.

The best way to see how a CFD works is through an example.

Range of Markets for CFDs

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