Benefits of CFDs

Benefits of CFDs (from MF Global)

Trade on margin


CFDs are traded on margin, starting from 4% for FX CFDs and 5% for Share, Index and Commodity CFDs. This is a more efficient use of your capital because you only have to allocate a small proportion of the total value of your position to secure a trade, while maintaining full exposure to the market. This enables you to magnify the returns* on your investment.
Benefit from rising and falling markets
CFDs give you the potential to profit when the markets fall, as easily as when they rise. You can also hedge your long share positions in falling markets by shorting with CFDs. CFDs provide you with more trading flexibility and give you more opportunities to profit. It is just as easy to sell a CFD as it is to buy. Going short in the physical market may also require a higher margin on the value of the position. CFD providers do not usually distinguish between a long and a short position in this regard. Therefore, on this basis alone, a CFD is a more effective means for a trader to benefit from falling markets (and short term intraday movements) and can also be used more easily to hedge long positions in the physical market.
Margins & Leverage
Margin and leverage are terms that are sometimes used interchangeably, but it is important to distinguish between them.
Margin is the amount of deposit required to secure a position starting from 4% for FX CFDs and 5% for Share, Index and Commodity CFDs. The margin is calculated as a percentage of the notional value of the position and is charged to cover the traders’ account in the event that the position moves against them. The CFD Margin requirement set by a CFD provider is determined by a range of factors including the liquidity of the underlying instrument and its capitalisation.
Leverage, also known as gearing, is the ability to take a position with notional value greater than the cash outlay required. For instance traditional share trading has leverage of 1:1. That is, for every $1 of investment the trader is required to pay $1 in cash. A Share CFD position with a 5% margin requirement has leverage of 20:1. That means for every $1 of cash invested the profit or loss will be multiplied by factor of 20. Leverage means returns are magnified and this applies equally to gains and losses.
Share CFDs - Corporate Actions / Dividends
Share CFDs generally reflect the corporate actions of the underlying share, which includes receiving (or paying) dividends where appropriate (excluding franking and imputation credits). If you hold a long Share CFD position over its ex-dividend period you are entitled to receive the amount of the dividend. Alternately, if you hold a short Share CFD position over the ex-dividend period, you are liable to pay the amount of the dividend. Share CFDs are also subject to other corporate actions such as bonus and rights issues.