An Introduction

CFD stands for Contract for Difference. This is an agreement to exchange the difference in value of a particular share, index, currency or commodity between the time the contract is opened and the time at which it is closed. A CFD price mirrors the price of the underlying asset.

CFD's Explained

Trading CFDs on Margin

CFDs are traded “on margin” with the profit/loss being set by the difference between the price the CFD is opened and the price at which it is closed. It is possible to create significant opportunities through “margin” as a CFD investor only has to use a deposit to hold a position, meaning only a small proportion of the total value of a position is needed to trade allowing the client to magnify market exposure. Trading “on margin” increases risk significantly by magnifying the extent of potential losses and potential losses can exceed the initial investment. It is important that an investor understands the risks associated with the underlying market and the relationship between margin and leverage. If a position requires a smaller margin deposit, it in- turns means that your exposure to the underlying market can be much larger and you are responsible for the full position size. If a position moves against you and you wish to keep that position open you may have to make further deposits in order to cover the margin deposit required to keep the position open. At MB Capital we would never recommend for anyone to fully margin their account i.e use their account as a full deposit to open the maximum amount of positions and it is something we monitor as adverse movements can also effect this. CFD’s are designed for short term trading and it is important that you monitor positions and understand the strategy and overall exposure before entering the market.

Trading CFDs – Long or Short

Trading with CFDs allows the client to hold both “long” and “short” positions. The benefit of this is that significant profits can be made both on the way up and on the way down giving you the opportunity to profit in a falling stock market. There is the potential to make a loss of significantly more than your initial investment should the market move against you.

Stop Loss Orders

Stop loss orders can be used as an effective loss management tool to help cut losses early and ensure you do not run a loss that requires you to add further funds in order to keep your positions open. A stop loss is essentially an automatic order placed in the market that if the price hits it, it will automatically close the position at that price or worse to ensure no further losses. With a standard stop loss there is a risk of slippage, what this means is if you enter a trade at 100 and had a stop loss at 98 but the market price opened at 96, you would get closed at 96 as the price didn’t trade at 98. The risk of slippage is reduced by trading larger more liquid stocks but there is always a risk should an event happen that causes the share price to gap. For example if you were shorting a stock and a bid was announced the price may jump much further than the stop loss price resulting in much larger losses. There is the opportunity to trade with guaranteed stop losses which come as a small charge which is much like an insurance premium, if the price you get is worse than your stop loss you will still be guaranteed the stop loss price.

No stamp duty on CFD trades

Unlike traditional shares, with a CFD the client is not required to pay stamp duty every time a trade is opened. This makes CFDs ideal for trading in the short to medium term markets. CFDs like shares may be subject to Capital Gains Tax on any gains. Tax treatment depends on individual circumstances of each client and may be subject to future change. You should consult your tax advisor in relation to your personal circumstances.

Immediate Settlement at the CFD Market Price

There is no settlement period when closing a CFD position – meaning an investor can buy and sell positions instantaneously.

Dividends on CFD trades

Like traditional shares, CFDs have the added benefit of dividend income on “long” positions. This is calculated on the close of business the day before the stock’s ex-dividend date. This works in the reverse if the client holds a “short” position as the client is liable to pay the dividend due. The ex-dividend date was created to allow all pending transactions to be completed before the record date. If an investor does not own the stock before the ex-dividend date, he or she will be ineligible for the dividend pay-out. A CFD mirrors the underlying stock with the benefit of instant settlement as a sum of money equivalent to the dividend payment is settled when the stock goes ex-dividend, you do not have to wait for the dividend payment date like you would with a Share.

No Expiry Date on CFD’s

CFDs have no expiry date; therefore you can hold a CFD for any period of time. As CFDs are traded on “margin” investors pay or receive an overnight financing rate linked to the London Inter Bank Offered Rate, (LIBOR). (Please see CFD Trading Examples). It is important to be aware of this when considering your investment objectives as interest charged on trades can reduce the effectiveness of returns.

Advisory CFD Trading

Advisory CFD Trading

As a client of ours you will have the opportunity to decide on the level of service that best suits your needs and lifestyle. This ranges from an “execution only” service which has the benefit of research e-mails being sent directly to your inbox, through to having “direct contact” with your own broker. Your personal broker will know your interests, investment requirements and will keep you fully updated on each trade executed.

Through researching relevant economic and company news, and up to date analysis of global markets we can bring you, the client, information regarding your positions within a prompt time frame which is vital to give clients the best opportunity to trade.

 

Research and Analysis:

 

Clients greatly value our Research and Analysis as well as our Investment Advisors opinions and views which have been widely reported in the Financial Press over the years such as BBC business and the Financial Times. By having a Stockbroker focusing on doing the research for you, it allows you to get the information you need and want without having to sift through the whole market when a lot of what we find is irrelevant to your strategy or holdings. We bring to you what we believe are the best opportunities aligned with your areas of interest and the great thing about an advisory service is that you are fully in control and only commit to a position if you are 100% happy and on the same page.

 

Monitoring positions:

 

As part of the service we fully monitor your positions for you. With our live news feed direct from the London Stock Exchange, if something is announced to the market and it effects your positions or gives us the opportunity to potentially capitalise on the information. We can be straight on the phone to you, keeping you updated so that you don’t have to commit your time to this. This means you never miss out on an opportunity if we feel one has presented itself and also just as importantly we can be proactive in banking a profit if the landscape of the market changes. It is a partnership and it is your money so you are the boss, as part of the service we recommend using stop losses to cut losses at a certain point if a position moves against you and we can also set limit orders that will automatically take a profit for you also.

 

Trading Platform:

 

As one of our clients you will also be able to monitor and trade your positions around the clock online through an award winning platform offering state-of- the-art charting software and trading tools. You can trade yourself online with the trading platform we provide or use it as a tool to keep abreast of your positions and exposure which we strongly recommend. This ensures that everything is clear and transparent and you can go on and also carry out your own research if you would like to. Again, on top of this we’re here at the end of the phone should you want an update at any time or have any questions. We can also set up to email you a daily statement so you can have an up to date snapshot direct to your inbox.

 

Personal Service:

 

It really is a personal service tailored to suit you so we will bring to you only the information that is relevant and you can get involved as much or as little as you like whilst we provide you with the opportunity to have an amount of exposure to the market that you are happy with at any given time. Through the platform, the direct contact details provided to you and the proactive approach by us when we see something that we believe would be of interest to you we try to ensure you have all bases covered and get the service you desire. It is our personal service that sets us apart, we want you to enjoy trading with us and as part of that process we ensure you are kept fully up to date and get to know you as a client before your first trade is even placed. We want to ensure you fully understand the product before you start trading with us and we are here every step of the way to ensure all questions are answered before setting up an account.

CFD Trading Examples

CFD Trading Examples

Below is an example of an opening trade in, for example, Tesco. It shows the difference between an investor buying a position in shares and an investor buying the same size position using CFDs.

Trade 1: Result Profit

Opening TradeBuying SharesBuying a CFD
Price of Tesco200p200p
Number of Shares50005000
Value of Position£ 10000£ 10000
Stamp Duty (0.5%)£ 0 (0.5%)£ 0
Commission£ 100(1%)£ 50(0.5%)
Deposit Required£ 10000£ 1000

Assuming after 3 days both investors sell their Tesco holding and make a profit

Closing TradeSelling SharesSellinga CFD
Price of Tesco206p206p
Number of Shares50005000
Value of Position£ 10300£ 10300
Commission£ 103£ 51.5
Financing Charges*NIL£2.67
Net Profit£ 47£ 195.83
Return on Equity Deposit0.47%19.58%

The table below gives an example if an investor were to close the position in Tesco at a loss after 3 days

Closing TradeSelling SharesSelling a CFD
Price of Tesco196p196p
Number of Shares50005000
Value of Position£ 9800£ 9800
Commission£ 98£ 49
Financing Charges*NIL£2.67
Net Profit£ 448£ 301.67
Return on Equity Deposit-4.48%-30.17%

CFD positions held over night are subject to over night financing. The CFD investor has paid a standard financing charge of £2.67 for holding the position. Interest is charged on an overnight basis. It is calculated by taking the overall position size, which is £10,000 x 3.25% (LIBOR + 2.75%) divided by 365 x the amount of days the position is open. 3 days = £2.67. Commission is charged as a percentage of the total value of a trade. Long positions held for extended periods can reduce returns, in some cases rendering the leverage obtained as comparable to buying a contract or share completely in the market. Through holding a CFD the client does not own the underlying share and, as such, does not have any voting rights.

Popular Trading Strategies

CFDs provide a flexible and cost effective way to undertake many different trading strategies. Our research and analysis allows accurate implementation of strategies, including:

Hedging

Investors with established holdings can use CFDs to protect against the variables in the market place that occur day to day. In some cases it can be more cost effective to open a short CFD position as opposed to selling the physical shares, only then to buy them back at a later date.

Pairs Trading

MB Capital’s traders will be looking at similar companies within specific sectors, for example Shell and BP or Tesco and Sainsburys. CFDs can be utilised by “going long” on the perceived undervalued stock whilst “going short” on the perceived overvalued stock. This can be effective when there is a short term out-of- sync movement to their correlation.

Tax Efficient Trading

Investors with funds in traditional shares can use CFDs in some cases to hedge against these shares without realising a potential taxable gain. The result of this is the investor can control the time by which their gains or losses are realised. The key to tax efficient trading is not just about big gains, but primarily about limiting potential losses. Our traders and advisors can provide tailored strategies and advice about how to invest resources. Gains made from CFDs may be subject to Capital Gains Tax. The tax treatment of investments depends on the individual circumstances of each client and may be subject to change in the future. Please consult your tax advisor for further information on your specific situation.

The nature of CFDs is that they are traded “on margin”. This means that the initial investment magnifies your potential gain or loss. Clients can use “Limit Orders” and “Stop Losses”. These tools allow investors to either open or close their positions if pre-set levels are reached and it is thus possible for clients to limit losses and lock-in profits.

Limit Orders

A “Limit Order” is an instrument that is used to execute a trade at a pre-set price. For example a position can be set to open at a certain level when the market hits your price target. You can open both long and short positions through using a limit order. A limit order can also be used to take a profit and close a position once it hits a pre-determined level without you having to oversee the execution of the position.

Stop Order

Stop loss orders can be used as an effective loss management tool to help cut losses early and ensure you do not run a loss that requires you to add further funds in order to keep your positions open. A stop loss is essentially an automatic order placed in the market that if the price hits it, it will automatically close the position at that price or worse to ensure no further losses. With a standard stop loss there is a risk of slippage, what this means is if you enter a trade at 100 and had a stop loss at 98 but the market price opened at 96, you would get closed at 96 as the price didn’t trade at 98. The risk of slippage is reduced by trading larger more liquid stocks but there is always a risk should an event happen that causes the share price to gap. For example if you were shorting a stock and a bid was announced the price may jump much further than the stop loss price resulting in much larger losses. There is the opportunity to trade with guaranteed stop losses which come as a small charge which is much like an insurance premium, if the price you get is worse than your stop loss you will still be guaranteed the stop loss price.

Markets Covered

MB Capital offer you the opportunity to trade all popular markets internationally from the comfort of your own PC. The most popular products traded at MB Capital are:

Equity CFDs

Access stock markets throughout the UK and Europe and as far as Hong Kong to the US and back again. We provide clients with the ease of instant execution and a spot currency execution rate, making trading equity CFDs overseas simpler and easier than trading the underlying asset.

Index CFDs

Index CFDs allows the client to make gains on a moving market without having to single out individual stocks. Index CFDs can be useful to get exposure to a market and its direction and very popular with day trading, in-and-out looking for quick opportunities.

Commodities

Trade a wide variety of metals and energy products like gold, copper and oil through to soft commodities such as Orange Juice and Cocoa. Having your own personal relationship with your broker enables him to keep you updated with news and analysis that is relevant to you.

FOREX Trading

You can trade all major currencies around the clock and have access to an extensive range of currency pairings. If there are any specific markets that you are interested in across any product, please feel free to contact us and we will endeavour to provide them.

FAQs

Do MB Capital offer an Advisory CFD Service?

MB Capital specialise in bringing research and analysis to our clients. Clients have the option of having their own personal broker who can be available to give you as much or as little advice as you would like. Treating each and every client as an individual enables us to tailor our service to your needs as far as possible. To discuss this further please contact us.

What are the benefits of using MB Capital?

MB Capital is an independent, privately owned company that specialises in CFD trading. We provide tailored trading and broking services including advice, recommendations, independent research and Award winning trading software. MB Capital is authorised and regulated by the FCA. We are here to bring you the level of service you require and to ensure you always feel as though you are our most important client rather than feeling that you are one of many.

How do I place a CFD trade?

You can trade CFDs as you would ordinary Shares. As all trades are settled for cash, no order will be accepted unless there are sufficient cleared funds in your account to be used as your initial deposit. Trades can be carried out over the phone or on-line through our trading platform.

What is the ‘Bid’?

The “Bid” is the price at which the share is sold, unless an order is placed to sell on the offer using DMA. The bid price indicates a buyer in the market that is willing to pay the price in question.

How do I open an account?

Opening an account with MB Capital is straightforward, however we have to assess to our standard that CFD trading is suitable for you. Our team is here to answer any questions you may have and will assist you step by step in the short application process. Please apply online. Alternatively please contact us.

Which products can I trade through my MB Capital account?

You can trade Equity CFDs, Index CFDs, Sector CFDs, Foreign Exchange, Futures, Options and cash equities (shares) all through one single account.

How long can I hold a CFD?

There is no expiry date on a CFD position. Clients can hold a position, long or short, for as long as they would like to.

Are there any tax implications through trading CFDs?

CFDs are exempt from stamp duty but any profits may be subject to CGT (Capital Gains Tax), however losses may also be offset against CGT. Tax treatment depends on individual circumstances of each client and may be subject to future change. You should consult your tax advisor in relation to your personal circumstances.

What is trading a CFD on Margin?

CFDs are traded “on margin” with the profit/loss being set by the difference between the price the CFD is opened and the price at which it is closed. It is possible to create significant opportunities through “margin” as a CFD investor only has to use a deposit to hold a position, meaning that only a small proportion of the total value of a position is needed to trade allowing the client to magnify market exposure. However, trading “on margin” significantly increases risk by magnifying the extent of potential losses which can exceed the initial investment.

What is DMA (Direct Market Access)

DMA allows the trader to place an order for a share wherever desired, even within the ‘spread’. A trade without DMA can only buy a share at the offer price. With DMA however, the trader can place an order to buy at the current bid price or, where possible, within the spread.

How does the Financing work?

CFD positions held overnight are subject to overnight financing. It is calculated by taking the overall position size, and multiplying it by (LIBOR + 2.75%) and then dividing by 365 x the amount of days the position is open. Commission is charged as a percentage of the total value of a trade. Long positions held for extended periods can reduce returns, in some cases rendering the leverage obtained as comparable to buying a contract or share completely in the market.

What is LIBOR?

LIBOR is the London Inter-Bank Offered Rate. This is the figure used when London banks lend between themselves and is normally similar to the Bank of England base-rate. LIBOR is also used to calculate the interest on overnight CFD financing.

What is Level 2 (L2)?

A live level 2 feed is a way of seeing what is happening on the stock exchange to one particular share in a live scenario. You can see demand for the share and whether there are more prospective buyers than sellers, and vice-versa. If there are more prospective buyers than sellers for a share at one particular share price, one would reasonably expect the share price to rise.

What is ‘Shorting’ or “Going Long”?

Trading with CFDs allows the client to hold both “long” and “short” positions. The benefit of this is that profits can be made both on the way up and on the way down giving you the opportunity to profit both a rising and falling market. “Going long” is when you take a position and profit from it moving upwards and “shorting” is when you profit from a position moving downwards.

What is the Spread?

The spread is the difference between the price that you can sell or buy an asset. This consists of the ‘bid’ and ‘offer’ prices.

If I buy Equity CFDs does that mean I own the shares?

With a CFD you never own or have the right to the underlying asset. The agreement reached between the two trading parties for an Equity CFD is to exchange the profit or loss on a stated transaction. Through holding a CFD the client does not own the underlying share and, as such, does not have any voting rights.

Do I receive any Dividends on Equity CFDs?

Like traditional shares, CFDs have the added benefit of dividend income on “long” positions. This is calculated on the close of business the day before the stock’s ex-dividend date. This works in the reverse if the client holds a “short” position as the client is liable to pay the dividend due. A

Ex-Dividend Date

The first day of the ex-dividend period. The ex-dividend date allows all pending transactions to be completed before the record date. If an investor does not own the stock before the ex- dividend date, he or she will not receive the dividend. All pending transactions that have not been completed by the ex-dividend date, the exchanges automatically reduce the price of the stock by the amount of the dividend. This is done because a dividend pay-out automatically reduces the value of the company and the investor would have to absorb that reduction in value as neither the buyer nor the seller are eligible for the dividend.

Risk Factors

CFD’s involve high risk and are therefore not suitable for every investor. Profits and losses can be many times your initial deposit. Please refer to our Contracts for Difference brochure for more information. CFD’s currently do not attract Stamp Duty, although these positions could change.

Open an Advisory Trading Account

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Risk Warning Notice

Contracts For Difference 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 poses a risk of loss to your capital. 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. Tax treatment depends on your individual circumstances and may be subject to change in the future. If in any doubt please seek further independent advice.