1. What is a CFD?

A CFD, or ‘Contract for Difference’, is a financial instrument that allows you, the investor, to speculate on movements in a company’s share price or a market index, without investing directly into either. You simply buy an instrument that replicates the price movements of the underlying investment, and only requires you to put down a small deposit of between 5 – 20% the value of the underlying investment.

  • This ability to ‘leverage’ your money means, for example, that you can effectively receive the investment returns on shares worth £10,000, whilst only putting down a deposit of £1,000, (10% the value of the underlying shares).
  • Many people think of trading CFDs in the same way as trading shares - but in a highly leveraged form. Both are researched and traded in the same way - and both are affected by the same market factors, such as company news, the economy and political developments.

The most commonly traded CFDs are typically those relating to individual stocks & shares, but you can also trade CFDs linked to many of the global stock market indices, commodities, currencies and industry sectors.

2. Trading shares vs. trading CFDs

Obviously there are a number of significant differences between trading shares and CFDs. The biggest difference is the level of risk. There is the potential to enjoy big returns on CFDs if the market swings in your favour – or big losses if the pendulum swings the other way! You can lose more money than you initially invest and you may need to make further deposits at short notice if your position moves against you.


The following table highlights the most important issues that you should be aware of:

Shares CFDs
Trading Opportunities Huge availability of UK and overseas shares – although profits are only available in a rising market. Huge range of CFDs linked to individual shares, indices and sectors. Trade ‘long’ if you think a price will increase. Go ‘short’ if you think a price is set to fall – giving you the opportunity to make a profit in a falling market.
Share Ownership When you trade shares, you are buying or selling a percentage of the underlying company – the broker is only an intermediary. When you trade CFDs, you are not buying shares in the underlying company, but purely have a financial arrangement with the broker.
Stamp Duty Stamp Duty is a government tax charged at 0.5% on all purchases of UK shares. Trading CFDs does not involve actually buying shares – and so is exempt from Stamp Duty.
Leverage Share trading requires an outlay of 100% the value of the investment at the outset – i.e. buying £10,000 of shares, requires a £10,000 outlay. CFDs only require an initial margin of, for example, 10% the value of the trade - i.e. to trade a position of £10,000 shares requires an initial margin of only £1,000, or 5% (£500) of the value of the market index.
Potential Returns A typical 10% movement of a share price will give you a 10% gain or loss on your investment. High risk/ reward – the high degree of leverage inherent in CFDs means that a typical 10% movement of an underlying share price will give you a 100% gain or loss on your initial margin.
Maximum Losses In the unlikely event of a company going bankrupt, your maximum potential loss would be limited to your initial investment. Be very clear of the maximum potential loss on both long and short positions before you trade. The maximum potential loss on a long position is the notional value of the trade that you have bought into- i.e. if you have bought a CFD to trade a position of £10,000 shares with only £1,000 deposit, your could lose the full £10,000 if the underlying company goes bust. If you take a short position your maximum potential loss is almost unlimited if the share price continues to rise. It's very important that you keep a close watch on your open trading positions and use Limits and Stop Losses to protect yourself.
Order Types Available You can use Market Orders to trade immediately or Limits and Stop Orders to exercise some control and protection whilst you are not monitoring your position. CFD trades have the same range of Market, Limit and Stop Loss orders, with an additional feature known as a Guaranteed Stop order.
Dividend Policy Dividends credited to your account. Dividend payments impact on both the value of your CFD and your cash position on both long and short positions.
Investment Duration Share trading is for both the short-term trader as well as the long-term investor. Trading CFDs is used mainly by customers who trade in and out of positions frequently.

3. CFD Markets

CFDs are now commonly used as a highly leveraged method for trading individual stocks and shares, but they also now cover a wide variety of other markets:

  • Individual equities – choose from thousands of CFDs covering the individual stocks and shares from the UK, US and Europe.
  • Stock market indices – the FTSE, Dow Jones, Nasdaq, DAX, Nikkei and many other smaller indices.
  • Stock market sectors – trade most of the major industry sectors, such as Banking, Aerospace, Construction or Insurance.
  • Currencies rates – many of the world’s major currencies and exchange rates are traded through CFDs, including euro/ £, euro/ $US and £/$US.
  • Commodities – speculate on the price of oil, precious metals, pork bellies and orange juice.

4. Examples

Now let’s have a look at a couple of practical examples of how you might use CFDs to trade an individual share:

Placing your order

Let’s assume that you switch on your computer at the beginning of the day and find that the Tesco share price closed at 300p last night.

  • You think they are undervalued and want to buy.
  • Your CFD broker is quoting you a Bid – Offer spread of 300.00 – 301.50 for Tesco CFDs.
  • You have the option of ‘buying’ the market, (or ‘going long’), if you think the price of Tesco shares will rise, or ‘selling’ the market (‘going short’) if you think the price will fall. You think the price will rise and choose to buy a CFD for 3,000 shares at the Offer price of 301.50
  • The notional value of the shares you are buying is 301.50 x 3000 = £9,045.
  • You will need to pay commission, typically @ 0.2% of the notional value for shares, £9,045 x 0.2% = £18.09
  • You also need to hold a 10% deposit in your account (also known as the NTR) = £904.50
  • (You may also need to pay a daily finance charge to your CFD broker for holding your position open overnight).
Closing your position
There are now 2 possible eventualities here – the price of Tesco could move up or down:
  1. If the price goes up over the next couple of days, to 318.00 – 319.50, you might choose to close your position and take the profit. You sell your CFD for 3,000 shares at the Bid Price of 318.00.
    • The notional value of the shares you have now sold is 318.00 x 3000 = £9,540.
    • Again, you need to pay commission of 0.2% the notional value, £9,540 x 0.2% = £19.08
    • You have made £9,540 - £9,045 = £495 profit (minus commission of £37.17 and any finance charges = £457.83).
    The reality is that you have made £457.83 on an initial deposit of £904.50 – a 51% return, whilst the share price has moved little over 5%. A nice result!
  2. If the price starts to fall over the next couple of days, down to 291 – 292.5, you might choose to cut your loss and close the position. You sell your CFD for 3,000 shares at the Bid Price of 291.00.
    • The notional value of the shares you have now sold is 291.00 x 3000 = £8,730.
    • Again, you need to pay commission of 0.2% the notional value, £8,730 x 0.2% = £17.46
    • You have lost £9,045 - £8,730 = £315 (plus commission of £35.55 and any finance charges = £350.55).
    In this case you have lost £350.55 on an initial deposit of £904.50 – a 39% loss, whilst the share price has only fallen by 3.5%. Very disappointing, but this could have been far worse if the market had deteriorated further.
Limit orders

However, most of the major CFD brokerage firms also offer some form of limit and stop orders which will automatically execute buy and sell orders on your behalf to take the profit if the market moves favourably or limit your loss if the market goes against you.

5. City Index

City Index is a specialist provider of financial spread betting and CFD trading. First established in 1983, City Index is part of IPGL Limited, which is also a substantial shareholder in the world’s leading derivatives broker, ICAP plc.

City Index offers thousands of instruments on the world’s financial markets through a real-time trading platform – including UK, European, US and Far East markets, currencies, commodities and individual equities.

City Index offer two types of trading account, depending on how you want to trade:

  • Deposit Account – gives access to the full range of City index instruments
  • Limited Risk Account – offers limited markets with all bets covered by guaranteed stop loss orders
To open an account or find out more about City Index, please click here.