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In this section we offer an introduction to CFD (Contracts for Difference) trading and how it works, featuring examples and reasons to trade CFDs. We also discuss the related pricing and funding requirements.
|Introduction to CFDs||Trading CFDs||Pricing and funding|
|What is a CFD? How does CFD trading work?||Why trade CFDs? CFD markets Risks of CFD trading||Spreads Commission Margin Funding and interest Currency conversion Other fees|
The two-way price that we and other providers charge to trade CFDs represents a charge for our service. The difference between the bid and offer prices is called the spread, and we wrap this around the actual price of the underlying market.
IG, like other CFD providers, will charge a commission on equity products, but all other markets are commission free.
Share CFDs usually incur two commission charges: one at the opening and the other at the closing of the trade. Our rates start as low as 0.1% of the contract value on popular shares.
When trading on margin, you do not have to put up the full value of the contract. Instead we'll ask you to make a payment which satisfies our opening margin requirement for that market.
Margin requirements can be broken into two parts:
This is an initial amount that you will be required to pay when opening a position. It is also often called a deposit or deposit margin, and can range from 30% to upwards of 60% of the value of the contract. The initial margin is deducted from your account when you open a position, and replaced once the position is closed.
For example, let’s say you wanted to trade 8000 BT shares at 150.0p. In the underlying market, this would cost you 8000 x £1.50 = £12,000. With CFD trading, however, you only have to put up a percentage of that value. In this case, let’s say BT is margined at 5%: your initial margin would be just 8000 x 150.0p x 5% = £600.
This initial margin could be reduced by adding a guaranteed or non-guaranteed stop order to your position. To find out more, take a look at our stops page.
Margin rates and slippage factors can vary, dependent on the regulatory rules governing the country in which your account is based.
Variation margin, also known as maintenance margin, is an amount of money we will require you have available in your account at all times. This is to cover any exceptional moves the market might make against you.
If the market goes in the wrong direction for you, we'll deduct a variation margin amount from your account. If your account drops below the required variation margin, you will be asked to top up your cash balance. This is known as a margin call.
Trading on margin amplifies the potential profit and loss of your positions, so you should be sure to understand the initial margin and variation margin requirements fully before trading.
To find out more about margin and deposits, see our leverage section.
CFDs are a leveraged product and can result in losses that exceed your initial deposit.
When you trade CFDs, there are certain costs incurred for the time you hold your position open. These are financing costs, and they reflect the cost of borrowing or lending the asset to which your position relates.
When you open a trade, we factor the cost of running that trade to its expiry date into the price. For example, a futures price like June FTSE will already contain financing (or the cost of carry) in its price. This is why you’d typically see us quoting a futures price higher than the cash price.
A daily contract, however, is priced according to the current cash price of the underlying instrument. You can choose to roll over your position to the next day, but this will accrue financing costs – so if you are long you pay the costs, and if you are short you receive them.
For an equity trade, for example, the daily interest adjustment you would incur is calculated as follows: number of shares x current share price x (annual interest rate/365).
The ‘annual interest rate’ is dependent on the trade’s denomination. For a UK stock, it will be based on a UK interest rate, while for a US stock it will be based on a US lending rate, and so on. So for example, if we charged 2.5% above an underlying rate of 5%, the total would be 7.5%.
Let’s say you have 8000 shares in BT, and BT closes at 151.0p. If you decide to roll your trade over, the interest you would pay would be: 8000 x 151p x (0.075/365) = £2.48.
Bear in mind that you can also go short, in which case you would actually receive financing of 5% minus 2.5%. At the time of writing, however, the base rate in the UK is 0.5%, which means that even on a short position you have to pay interest of 0.5% - 2.5% = -2%.
We give you the option to choose a base currency for your account. This means that profits or losses for any foreign currency trades will be converted back into the base currency before it appears on your account, including any charges such as interest or dividends.
There may sometimes be other fees from outside organisations that we'll need to pass on to you. These could include administration charges for credit card payments or telegraphic transfers, for example.