A CFD is a contract between you (the client) and Sharewatch Global Markets. The difference between where you enter the trade and exit the trade is the Contract for Difference (CFD).

 

CFDs mirror the price of an underlying instrument. Quite simply, CFDs allow you to enjoy the benefits of trading an instrument without having to physically own it.

Originally created as a hedging tool for large institutions to cover their equity exposure, CFDs have exploded in popularity with individual investors, particularly in Europe and Australia. And for good reason, since CFDs offer significant benefits in comparison to other trading products, specifically physical share trading.

For starters, CFDs are leveraged. The advantage of a smaller outlay, as well as the opportunity to gain from rising and falling markets translate into an exciting new trading product, which is widely considered a good alternative to physical share trading.

At Sharewatch Global Markets, we offer you the ability to trade on thousands of instruments, including Canadian and Global Shares, as well as International Indices, Sectors, Commodities and Treasuries. What’s more, if you have a view on a market sector (mining, energy or banking) or an entire Index (TSX60, US30, UK100, Japan225) CFDs represent a cost-effective way to trade these instruments from a single trading account. Even better, all Index, Commodity, Treasury and Sector CFD trades are commission free*.

In short, CFDs are simple and inexpensive to trade, making it an attractive trading product that is conducive to most trading strategies. However, due to the leveraged nature of this product, it does carry a high degreee of risk. Please see the CFD Examples section to understand further how you can lose as well as gain with CFDs.

Now that you know more about where the smart money goes, find out more about why you should be trading CFDs.

 

Benefits of CFDs
CFDs were traditionally only available to institutional investors. Now they are one of the world’s fastest growing ways to trade the financial markets. A CFD enables you to trade on a financial instrument such as a share or a commodity without having to physically own it. This means CFDs have a large number of benefits over traditional ways of trading such as buying and selling shares through a stockbroker.

Trade with Low Commissions
Sharewatch Global Markets charge a low commission charge on equity instruments, currently the most competitive in the market. Other CFD instruments, such as indices, commodities and treasuries are currently commission free. Please check our Rates Schedule for current charges.

No Stamp Duty
Unlike traditional share trading CFDs incur no stamp duty on Shares.

Access Global Markets
CFDs allow you to trade on a whole host of global instruments all from one account. Trade CFDs on Shares, Indices, Commodities, Sectors and Treasuries 24 hours a day.

For a full listing of the range of markets that we offer, click here.

Margin Trading
CFDs are a leveraged product which means that you are only required to deposit a fraction of the overall value of the trade. Typically margins with Sharewatch Global Markets vary between 1% and 10%. Margin means you can magnify the returns on your investment. However, it is important to remember that losses too will be magnified so margin trading is not necessarily for everyone.

Going long or short with CFDs
Markets go down as well as up. With CFDs you can potentially profit from falling markets because you are trading on the price movement of a financial instrument without physically owning it. This makes it as easy to sell an instrument as it is to buy. This is known as ‘going short’.
CFD Trading Example
A CFD offers you all the benefits of trading shares without having to physically own them. Simply put, it is a contract that mirrors the performance of an underlying instrument. It is traded on margin, and just like physical shares your profit or loss is determined by the difference between the price you buy at and the price you sell at.

CFDs work in a very similar way to Spread Betting and are also a flexible and cost effective way to trade a wide range of financial markets. CFD means Contract for Difference and just like other investments your profit or loss is determined by the difference between your buy price and your sell price.

The best way to explain how CFDs work is through an example:

Example of going short
1.ABC Corp is trading at 1599/1600 and you think the price is going to fall in value.

2.You decide to sell ABC corp CFDs at 1599.

3.You decide to trade 1000 shares. You sell 1000 CFDs at 1599 giving you a position size of £15990. 1000 x 1599 = £15990

4.Equity CFDs attract a commission charge of 8 basis points. A basis point is 1/100th of a percent. To determine how much commission you would pay, you multiply your position size by commission charge. In this example the charge is £12.79. £15990 x 0.08%=£12.72

5.Your margin requirement with Sharewatch Global Markets for ABC Corp is 5% therefore £799.50 will be allocated from your account against this trade as initial margin. Remember if the share price moves against you, it is possible to lose more than this £799.50 initial margin.

6.Two days later you see that ABC Corp has fallen to 1578/1579p

7.Therefore you choose to buy CFDs in ABC Corp at 1579 and realise your profit. The commission charge of 8 basis points also applies to the closure of the trade, equaling £12.63

8.You sold at 1599 and bought at 1579 which means ABC Corp fell by 20 pence. 20 pence x 1000 CFDs = £200 revenue.

9.You held the CFD position for two days, and because you went short you were effectively loaning us money so you receive two nights financing charge. This is how you calculate the financing you will receive;
£15990 (value of the position) x Libor - 2.5% (which in this instance = 2.5%) /365 (number of days in the year) x 2 (number of days position is held)
= £2.19

10.Therefore you add the financing payment to the revenue, and deduct the commission charges and realise a profit of £176.84

However, if the market had risen you would have made a loss, for example:
1.ABC Corp is trading at 1599/1600p and you think the price is going to fall in value.

2.You decide to sell ABC corp CFDs at 1599

3.You decide to trade 1000 shares. You sell 1000 CFDs with the value of £15990.

4.Equity CFDs attract a commission charge of 8 basis points. A basis point is 1/100th of a percent. To determine how much commission you would pay, you multiply your position size by commission charge. In this example the charge is £12.79. £15990 x 0.08%=£12.72

5.Your margin requirement with Sharewatch Global Markets for ABC Corp is 5% therefore £799.50 will be allocated from your account against this trade as initial margin. Remember if the share price moves against you, it is possible to lose more than this £799.50 initial margin.

6.Two days later you see that ABC Corp has risen to 1618/1619

7.Therefore you choose to buy CFDs at 1619 and realise your loss. The commission charge of 8 basis points also applies to the closure of the trade, equaling £12.95

8.You sold CFDs at 1599 and bought at 1619 which means ABC Corp rose by 20 pence. 20 x £10 = £200 loss.

9.You held the CFD position for two days, and because you went short you were effectively loaning us money so you receive two nights financing charge. This is how you calculate the financing you will receive;
£15990 (value of the position) x Libor - 2.5% (which in this instance = 2.5%) /365 (number of days in the year) x 2 (number of days position is held)
= £2.19

10.Therefore you deduct the financing payment and add the commission charges to the negative revenue and realise a loss of £223.48

*Rates based on daily cash rate, this rate is subject to daily market fluctuations
** Sharewatch Global Markets reserve the right to amend this rate with prior notice.