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Risk Warning
Below are frequently asked questions relating to trading CFDs (contracts for difference).
In principle there is no minimum opening contract value and you can execute trades at any level, although you need to ensure the risk on each position is controlled. An average contract size would be £10,000, however, this can vary depending on market conditions, margin required and account size.
Only the cash in your CFD account available to meet the margin requirement and the ability of the broker to deal in the underlying shares limits the maximum Contract Value.
Prime Markets provides trades on a huge variety of products from all major financial centres of the world, including stocks, indices, sectors, treasuries.
The advantages of trading CFDs include the ability to go long and short, the ability to place long and short term trades, instant execution, leverage, tight spreads and being exempt from stamp duty.
As a holder of a long or short CFD you do not pay the full underlying value of the contract. However, you are required to deposit collateral known as initial margin. Initial margin is calculated as a percentage of the full contract value and the rate varies according to the market capitalisation and volatility of a particular share. For example if the initial margin is set at 10% you can go long or short of a CFD worth £100,000 and deposit just £10,000, gaining ten times leverage.
Simply multiply the price by the amount of your stake. Multiply this by the initial margin and this is the amount of margin required to hold your position. The margin requirement for single stock trades is calculated on a percentage basis of the notional value of the position. On Stocks the margin requirement is usually no more than 10% of the value of your trade, most commonly 5%.
A deposit requirement and a margin requirement is essentially the same thing - the amount of equity you need to open or hold a position.
CFDs can be traded by anyone, however, CFDs are trading products that use leverage. Leverage magnifies movements in the underlying asset (equity, commodities, FX etc). This means that whilst profits are magnified so are losses. It is therefore important that you understand the risks involved in trading CFDs and we will test relevant understanding and knowledge and ensure that CFDs are a suitable trading product for you before you open an account. For more information please visit our Risk Warning page.
Whilst they are exempt from stamp duty, any profits on CFDs may be subject to CGT (Capital Gains Tax) but losses may also be offset against CGT.
There are no expiry dates on CFDs, as a result you can run a position, long or short, for as long as required.
Commission
Commission is charged on for either side of the contract, as a percentage of the total contract value. There are no hidden costs and you deal at the market price as we do not widen the spread of the share. Prime Markets is committed to offering a competitive commission rate which includes all the advice and monitoring you require.
Financing
Clients pay interest on the contract value of a long CFD. Interest is charged at a percentage over LIBOR (LIBOR is the London Interbank Offered Rate and is linked to base interest rates).
Clients holding short CFD contracts receive interest on the cash that the sale of the underlying stock would have generated. This is similarly paid at an agreed rate under LIBID (London Interbank Bid Rate).
For example, If a client was paying a long CFD funding charge of perhaps 2% over LIBOR and if LIBOR was 4%, the client would be paying a funding rate of 6% per annum. If the total contract value was £100,000 the funding charge would be around £16 for every day the contract was maintained (£6,000 divided by 365). This amount would be debited daily from your CFD account. The funding charge is only incurred if the position is held overnight. These amounts will be credited or debited on the next trading day.
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Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily a guide to future performance. Trading in these markets is generally considered to be suitable only for the more experienced investor as it carries a high degree of risk. An investor may not receive back the amount of their original investment and in certain circumstances may be liable for a sum that is greater than their original investment. If in any doubt, please seek independent financial advice.