CFD Trading

CFD, or "Contracts for Difference", are an efficient means for trading stock shares, DIF clients can trade CFD with 20% margin and zero commissions, utilizing state-of-the-art online dealing software. Traders can view prices and execute trades in real time.

The "CFD", or "Contract for Difference", was developed to allow clients to receive all the benefits of owning a stock without having to physically own the stock itself. For example, instead of purchasing 1,000 shares of Microsoft from a stock broker, a client could instead buy a CFD on Microsoft on the Dif Freedom trading platform. A $5 per share rise in the price of Microsoft would confer to the client a $5,000 profit, just as if he had purchased the actual shares that are traded on the exchange. A major difference is that there are no exchange fees and many of the inefficiencies of trading the underlying shares on the exchange are eliminated. DIF can therefore offer CFD with zero commissions and very attractive margin requirements. CFDs have grown in popularity dramatically over the past few years, and we believe that this will increasingly be the preferred way to trade the financial markets.

The other major benefit of trading a CFD is the fact that the client can trade on margin. CFD trading means clients can trade a full portfolio of Shares, without using the full amount of capital. Using the example above, a client purchasing $50,000 worth of CFD Shares will only be asked for $10,000 margin.

As with Shares, CFD investors benefit from normal market movements. Clients' open positions are valued in real time, with every tick of the market. Profits or losses similarly are credited to or debited from the clients account equity in real time.

Unlike physically purchasing stocks, clients only have to deposit approximately 20% of the value of the Shares. So if you want to buy $50,000 worth of Shares, you only need to have $10,000 on deposit with DIF.

Short Selling CFD

When short selling a CFD directly on an exchange (that we do not market-make), you will be affected by the rules for the stock market in that country. For example:

  1. For US CFD, an up-tick rule applies where you can only short sell on an up-tick.
  2. For Australian CFD, you may experience limitations on the amount of CFD you can short trade in a single day due to limited borrowing availability in the underlying market.

When short selling CFD, you can experience forced closure of a position if your CFD get recalled. The risk is particularly high if the stock becomes hard to borrow due to take overs, dividends, rights offerings (and other merger and acquisition activities) or increased hedge fund selling of the stock.

Costs of CFD Single stocks are divided into 2 types:

 1. Financing cost - cost of money to finance the entire trade, long or short, given that only a margin is required.

Single Stock CFD are a margined product. As such you finance the traded value through an overnight credit/debit charge. If you open and close a CFD position within the same trading day, you are not subject to overnight financing. When you hold a long CFD position you are subject to a debit calculated on the basis of the relevant Inter-Bank Offer rate for a the currency in which the underlying share is traded (e.g. Libor) plus a mark-up. The debit is calculated on the total nominal value of the underlying stock at the time the CFD contract is established.

 2. Cost of lending securities to short positions in the market.

A borrowing cost may be applied to short Single Stocks CFD positions held overnight. This borrowing cost is dependent on the liquidity of the underlying Stocks and may be zero for high liquidity stocks and can be very expensive for stocks under special situations. The specific borrowing rate for Stock can be seen as the Borrowing Rate under Account Trading Conditions, CFD Stock/ Index Instrument List in the trading platform DIF Freedom. When selling a CFD, the borrowing cost for holding the position overnight is shown in the CFD Trade module in the Estimated borrowing cost per day field. The borrowing rate will be fixed when the position is opened and will be charged on a monthly basis. Please be aware that for certain corporate actions events, the borrowing rate on the short position may be reset to the current rate in the market, upon the execution of the corporate action. Clients are recommended to check rates daily on short positions open during corporate actions as a way to predict the possibility of recall. Sustained increased rates are a sign of short squeeze. If you open and close a CFD position within the same trading day, you are not subject to borrowing costs.

Short positions in the CFD market presuppose that physical securities exist to lend. In normal market conditions there are securities available for an investor to open a short position.

Before 2008 when interest rates were at normal levels (>3%) short positions could benefit by receiving a credit of interest as opposed to long positions.

When in situations where interest rates that are loo low, there is an increased risk that needs to be evaluated by the investor, which the cost of financing and the cost of lending.

The abrupt fall of a company, which maintains a downtrend, triggers an increase in the cost of lending, because of the difficulty that the bank has, as a market maker, in obtaining shares to lend. The reason lies in the fact that those who have to borrowed securities to investors who want to be short, are harming their assets and therefore the cost of lending increases. It works like a compensation. It may happen that there are no more shares to be lent or that the few that exist are at a very high cost.

The bank, or  market maker,  in turn may seek new lenders at market prices (higher costs) and when the situation becomes more complicated, may still prohibit the opening of new short positions. At a latter case they can make a recall of all short positions, forcing investors who are short to close their positions immediately.

The ultimate case is when the regulator prohibits short sales of certain products, as happened recently, more than once since 2008, in relation to financial institutions. During these periods was not allowed to open short positions in listed banks.

 

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