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Functioning and risk


Functioning

When you trade CFDs you agree with the CFD provider to receive (or to pay) a sum of money depending on the position taken (long or short) on the CFD underlying price moves  (up or down), calculated between the date of the CFD initial trade and the date of the CFD closing: to close a CFD open position you have to trade in the opposite direction (if you are long a CFD, to close the position you have to sell and the opposite works if you are short a CFD).

The CFDs underlying's  can be  Shares, Equity Indexes, Global Financial Indexes,  Commodities, Commodity Indexes, Foreign Exchange Rates,etc ...
CFD price follows the CFD underlying: that’s why - CFDs are similar to financial futures contracts but they differ because they haven’t any  defined  expiration date; you can enter or exit CFDs at any time during market trading hours.

On a daily basis a CFD  is renewed and rolled –over (the position is transferred from today to tomorrow)  to the next day, if the same CFD position is kept open.
The big advantage and risk of CFDs trading is that you can deposit just a % of the CFD total value while you are participating to the profit and loss of the price moves of the CFD total value.

For Example, if the CFD total value is £20.000 and the margin is 5%, you can be exposed to £20.000 depositing just £1.000 to open your CFD position.

This could cause profits  and losses in excess of the initial margin.

To limit these losses you can  previously decide  to close the position if stop loss prices (pre input prices at which you close the position due to a loss) are traded: below a certain %  drop of the CFD purchase price for  long positions and the opposite for short positions.

There are no limits (apart from time limits imposed by underlying assets trading hours) to entry or to exit from a CFD position.

No time limit is placed on when a CFD exchange happens.

There are no restrictions placed on buying first or selling first.

No Uk Stamp Duty

Under the current tax lawe CFDs have another clear advantage over share dealing. This is because as you do not actually take physical delivery of the shares there is currently no Uk Stamp Duty payable, saving you 0.5% on each UK equity CFD purchase.

Just think, on a £ 10,000 ordinary share trade you would have had to pay UK Stamp Duty of £50.

Please remember tax laws can change in the future.

 

Risk

CFDs are leveraged products. They offer exposure to all financial markets while requiring you to only put down a small margin ('deposit') of the total value of the trade.

This allows you to take advantage (or disadvantage ) of the underlying price moves: the price will be up for a CFD long position and it will be down for a CFD short position for the total value of the trade while depositing only the initial margin.

This means that it's possible to lose more than your initial margin deposited, due to underlying adverse price moves and the activation of margin calls.

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