CFD on shares: everything you need to know about them
Almost everyone dealing center and broker In the list of instruments there is a group called CFDs. CFDs on raw materials and commodities are more or less clear, but the following CFD on shares less popular. This article is written to make this type of trading tools more understandable for ordinary traders. It will be mainly written in the format of a dictionary with accessible explanations for traders of different levels of training. Also, I will try to indicate original English terms in brackets, as they are more universal, and you will often encounter them when working with CFD on shares. I will not make long introductions, let's go straight to the topic.
CFDs are a completely speculative instrument
So, let's start with the first concept, CFD (ContractForDifference) or CFD is a transaction between a trader and a dealing center on payment of the difference in value between the current value of an asset and its value at the moment of expiration or closing of this contract. If we take CFDs on shares, they have no expiration date (unlike CFDs on futures contracts), and moreover, the ability to close the contract (or in our opinion, to close a CFD transaction) can only be done unilaterally by the trader, which is another important advantage.
As you have understood, CFD is a derivative instrument, the value of which changes depending on the underlying instrument, in our case, on the value of a share. It is an absolutely speculative instrument, and for this very purpose it was created as an opportunity to work with a small deposit.
Buying CFDs on shares does not involve physical ownership of shares. Thus, by buying a CFD, you do not become a shareholder of the company. Let's take a look at what a share is. A share (Share) is a security that secures the right to receive part of the company's profits (dividends) and the right to participate in the management of the company (shareholder fees). There are different kinds and types of shares, but we will not dwell on it, as it is not the main topic of the article, but there is a huge amount of information about it freely available on the Internet.
Of course, if you have a purchased contract for the difference on some stock, you don't qualify to participate in shareholder gatherings, but it's different with dividends. Now, we've come to the term dividend (Dividend) - is the portion of a company's profits that is paid to its shareholders according to the number of shares they own.
Dividend payment calendar
Many CFD brokers, like stock brokers pay dividends. Often, though, because it is not a stock, but a contract for difference, this concept is replaced by another - dividend adjustment (Dividend adjustment), although the essence does not change. Its amount is specified on the website of the dealing center, whose services you use. When you open the calendar of dividend payments, you will see several different dates. We will consider them in chronological order.
So, the first date is the "announcement date" (Declared Date). As of this date, the shareholders' meeting has already taken place, where they announced the company's profit and decided how much of it can be given for dividends. Thus, on this date, the amount of dividends to be paid per share is published.
The next date is the "registry fixing date" (Ex-dividend Date). It is on this day that you should own shares, or rather in our case CFDs, in order to receive the amount of dividend correction. And to be more precise, at the moment of opening of the trading session you should already have an open position on CFD on a share, i.e. in fact, the contract should be bought a day before the date of register fixation. It is important.
And the last date is the "Payment Date" (Pay Date). On this day you will receive your dividend adjustment if you hold a CFD on the stock on the record date. As you have realized, you don't need to hold the stock contract until the payout date, you can sell it even on the record date, your account is already on the register and you will receive your dividend adjustment without any conditions.
The frequency of dividend payments, as well as the amount, depends on the decision of shareholders. In general, they are paid quarterly, for some instruments once a year. This information is also mostly presented on the website of your dealing center. And one more point, not every company pays dividends all the time, you understand that sometimes companies finish their reporting period with a loss, and, in fact, there is nothing to pay dividends from, then the meeting of shareholders decides not to pay dividends.
Also, keep in mind that in order to receive dividends, you must have a buy position (Buy) contract. In case you have a Sell position at the time of register fixation, then the dividend adjustment amount will be debited from your account on the payment day. I would also add that many dealing centers have a dividend calculator, which is quite convenient. And, perhaps, that's enough about dividends.
ETFs - exchange traded funds
In CFDs on stocks, not all instruments are actually stocks in the full sense of the word. Some of them are securities of a slightly different type, they are called exchange traded funds. So, Exchange traded funds (Exchange Traded Fund or is it more common ETF) is an index fund whose shares are freely traded on the stock exchange. The structure of such a fund fully repeats the structure of the underlying instrument/index.
For example, a tool that all dealing centers that provide access to CFDs on stocks have for sure is the ticker tool SPY. This is a fund in which the underlying instrument is the S&P500 index. This fund includes shares of all companies that are included in this stock index and in the same proportion. By the way, this is the very first ETF, which began trading in the U.S., and at the moment, is one of the most popular instruments by trading volume. Traders also call it "Spider". Also, many dealing centers often have ETFs with such tickers - DIA, QQQ and others.
Multiplicity. All CFDs on stocks have two digits after the coma, this is related to the primary instrument - shares. Although, in principle, stocks in the U.S. that are worth less than a dollar have four digits after the coma, but such stocks do not have CFDs, as they are mostly so-called "junk" stocks (stocks of companies that have a high probability of being taken off the market).
Position size. Size 1 lot. contract for difference is equal to 1 lot on the stock exchange. In the USA (it is the shares of American companies that are mostly only available in CFDs) standardly includes 100 sharesThe price of the stock is the same as the price of the stock. Thus, if we buy a CFD with 0.01 volume, it is equal to the fact that we bought one share. It's pretty simple.
Shoulders. As I wrote above, CFDs were created for speculative purposes only, so using them without leverage makes no sense. Basically, in almost all dealing centers CFDs on stocks can be bought or sold with 10% collateral, i.e. with 1 to 10 leverage. Some service providers allow you to work with a leverage of 1 to 20 and even more.
Cost of operations. Here we come to the financial question. What are the fees we are charged for transactions and CFDs on stocks. The first thing is the commission. It depends on the broker, but on average it is equal to 0.05%. The commission is paid only when opening a position, unlike the stock market, where the commission is paid both at opening and closing. Further spread. On each CFD position, just like on currencies, we pay a spread. The spread on CFDs is static, not floating, and mainly depends on the value of the contract itself. The higher the value of the company, the higher the spread. And another cost is the overnight rollover fee, the so-called swap. Swap is usually a small cost, which, by the way, can be avoided in most cases if your dealing center has a swap-free accounts (and almost everyone has them).
One last point. CFDs on stocks are available for trading only when the asset (stock) itself is traded. If you trade CFDs on U.S. stocks, the trading hours are Monday through Friday from 9:30 a.m. to 4:00 p.m. exchange hours (EST). Therefore, often the charts of the instruments seem "equal". You should also take holidays into account, because unlike , during holidays, stocks, and therefore CFDs, are not traded.
These are the features CFD on shares, as you can see, there is nothing complicated. And in the next articles we will consider how to work profitably with this type of instruments, and what advantages it has over other instruments (by the way, for some reason almost no one uses them) and which are not found in any other instrument. See you soon!