Charles Hanover Investments - Guide to CFD Trading

A GUIDE TO CFD TRADING

Contents
Page 3
What are CFDs?
Page 4
Advantages of CFDs
Page 5
How CFDs Work (examples)
Page 7
Risks of CFDs & Risk Management
Page 8
Stocks as Collateral / Direct Hedging

What are CFDs?
Contracts for Difference (CFDs) allow investors to
speculate on the financial markets without tying up
the full amount of capital on a trade, that is you put
down a deposit and gain exposure to a larger position
in the market.
A CFD, or Contract for Difference, is an agreement
between two parties to exchange the difference between
the opening price and closing price of a contract. They
are a derivative that allow you to trade on live market
price movements without actually owning the underlying
instrument on which your contract is based. Since their
inception they have rapidly grown to become the goto
instrument for active traders looking to profit from
shorter timescale trades in the market. If you are reading
this it is likely because you are experienced in share
trading and are keen to hear of how CFDs can assist you
in being more nimble in the market, if so, do read on.
Since the turn of the millennium there has been rapid
growth in the CFD trading market as investors can see
the benefits of trading on margin and the capacity to
make money in rising and falling markets. This inherent
flexibility and transparency has helped CFDs to become
one of the fastest growing products available to private
investors.
This guide intends to provide an introduction to CFDs,
explain how they can be used and outline the risks
associated. Do be advised that CFDs are not suitable for
everyone and are classified as a high risk investment.
Should you wish to discuss your suitability or any of
the aspects covered do contact your broker at Charles
Hanover or if you are yet to become a client do call
0207 952 6350 where one of our team will be able to
answer any questions you may have.
CFDs were developed in the early 90’s and initially
were exclusively available to institutional traders and
hedge funds. By the late 1990’s CFDs became available
for private clients to gain access to the same levels of
leverage, flexibility, and cost efficiencies historically only
available to the institutions.
3

Advantages of CFDs
No Stamp Duty
Unlike traditional share dealing there is no stamp duty to pay on a CFD trade reducing trading costs.
CFD trades are not subject to stamp duty and meaning the investor can mitigate the 0.5% tax on each trade, on the
below example the cost savings are clear:
Share trade: £50,000 purchase of Barclays Plc shares, stamp duty = £250
CFD Trade: £50,000 CFD of Barclays Plc shares, stamp duty = £0
For the more active trader this saving can rapidly add up to quite a sizeable amount. For example if a typical trade of
£20,000 is completed, doing maybe 3 trades per week, the annual saving on stamp duty would equate to £15,600 – a
not insignificant amount. Through the lower cost base of dealing the active trader can further benefit through trading
off smaller price increments, increasing opportunities and profit potential.
Trade on both rising and falling markets
CFDs allow you to trade on the price of the instrument going down as well as up, enabling you to make money in
falling markets through “Short Selling”. Many investors use CFDs as a way of hedging their existing portfolios in times
of increased uncertainty, or to speculate on a share price going down in light of negative news on a stock (profits
warnings etc).
Efficient use of your capital
Rather than paying for the full amount of the trade, CFDs require an initial margin, or deposit to gain exposure to the
trade, this is referred to as a % of the traded value, i.e. Barclays is a 10% margin stock, as such:
Share trade: £50,000 purchase on Barclays, requires £50,000
CFD Trade: £50,000 purchase on Barclays, requires £5,000 (10%)
If the share price goes up by 5% both have made £2,500 profit, if the share price goes down by 5% both have lost
£2,500, however the share trader has tied up £50,000 of cash, and the CFD trader has only tied up £5,000 freeing up
capital to look at other opportunities in the market.
Risk Management
When trading on margin many investors like to limit their risk on a trade by attaching a “stop loss” order – an order
that is triggered should the position move against them by a certain amount. For example a client could choose to risk
4% on a trade, therefore on a £10,000 trade, the money at risk would be £400.
Do note, stop losses are generally “at market” orders, that means should the price trade at or through the stop loss
level then the order will be triggered to close the position at the market price. In times of increased market volatility
there is the potential for slippage whereby the investor could lose more than the intended amount.
4

How CFDs work
CFD Buy (“going long”) Example:
In the below example, an investor wishes to buy (go long) £50,000 of Barclays shares with an entry price of 250p,
Charles Hanover offers clients the opportunity to trade Barclays on 10% margin, meaning the client only needs to
invest £5,000:
Opening the trade
Opening The Trade
Share Price
Number of Shares
Total Exposure
Stamp Duty
Capital Required
Share Trade
250p
20,000
£50,000
@ 0.5% = £250
£50,250
CFD Trade
250p
20,000
£50,000
£0
£5,000
Closing the trade with a profit
After holding the position for 4 nights (opened on a Monday, close on a Friday) Barclays has risen to 260p, the investor
decides to close the position and realises a profit of 10p per share held. In this example the stamp duty saving is
clear when compared to the financing cost, and the power of leverage produces the greatly improved returns from
the initial capital invested:
Closing the Trade with a Profit
Share Price
Number of Shares
Total Exposure
Financing @ 3.5% for 4 days
Profit on the trade (difference –
stamp duty or financing)
% ROI (Return on Investment)
Capital required when opened
Share Trade
260p
20,000
£52,000
£0
£1,750
3.48%
£50,250
CFD Trade
260p
20,000
£52,000
£19.18
£1,980.82
39.6%
£5,000
Closing the trade with a loss
Using the same timescale, if Barclays share price had fallen to 240p after the 4 night holding period and the investor
decided to limit their loss closing the position crystallising a loss of 10p per share, the numbers are as below:
Closing the Trade with a Loss
Share Price
Number of Shares
Total Exposure
Financing @ 3.5% for 4 days
Loss on the trade (difference – stamp
duty or financing)
% ROI (Return on Investment)
Capital required when opened
Share Trade
240p
20,000
£48,000
£0
£2,250
-4.5%
£50,250
CFD Trade
240p
20,000
£48,000
£19.18
£1,980.82
-39.6%
£5,000
From these examples it is clear that CFDs provide improved cost efficiencies on shorter timescale trades maximising
net profits and minimising losses. It should also be noted that whilst utilising leverage results magnified profits, the
same is also true for losses.

How CFDs work
CFD Short (“going short”) Example:
In the below example, an investor is anticipating the price of Morrison’s shares will decline and therefore chooses to
short sell £50,000 of Morrison’s shares with an entry price of 200p. Charles Hanover offers clients the ability to trade
Morrison’s on 10% margin, meaning the client needs £5,000 to open the trade. Through a traditional stockbroker this
service would not be available meaning the client would not be able to take advantage of the anticipated decline in
Morrison’s share price.
Opening the trade
Opening The Trade
Share Price
Number of Shares
Total Exposure
Stamp Duty
Capital Required
CFD Trade
200p
25,000
£50,000
£0
£5,000
Closing the trade with a profit
After holding the position for 4 nights (opened on a Monday, closed on a Friday) Morrisons has fallen to 190p, the
investor decides to close the position and realises a profit of 10p per share held:
Closing the Trade with a Profit
Share Price
Number of Shares
Total Exposure
Financing @ 2.5% for 4 days
Profit on the trade (difference –
stamp duty or financing)
% ROI (Return on Investment)
Stamp Duty
Capital required when opened
CFD Trade
190p
25,000
£47,500
£13.70
£2,486.30
49.73%
£0
£5,000
Closing the trade with a loss
Using the same timescale, if Morrisons share price had risen to 210p after the 4 night holding period and the investor
decided to limit their loss closing the position crystallising a loss of 10p per share, the numbers are as below:
Closing the Trade with a Loss
Share Price
Number of Shares
Total Exposure
Financing @ 2.5% for 4 days
Loss on the trade (difference – stamp
duty or financing)
% ROI (Return on Investment)
Stamp Duty
Capital required when opened
CFD Trade
210p
25,000
£52,500
£13.70
£2,486.30
49.73%
£0
£5,000
A note on financing - When going long CFD financing is charged at 3 month LIBOR + 3%, and when going short the client
is credited with 3 month LIBOR -3%. In a low rate environment such as has been witnessed since late 2009 negative
overnight financing credit can occur, this means clients pay a lower level of financing to be short.

Risks of CFDs
The leverage available through trading CFDs can be a double edged sword in that whilst an investor can multiply the
profits the same is also true for losses. The more leverage that is used the higher the risk of the investment, below
are a few examples:
Cash covered - Lower Risk
In this instance a client might have £20,000 cash on a CFD account, if they run a £20,000 CFD in Barclays, this would tie
up only £2,000 of margin; as they are not using the leverage the risk is the same as when buying the physical stock for
£20,000 – if Barclays trades down 10% the investor is running a loss of £2,000 on the CFD, which would be the same
as if they had bought £20,000 of shares.
CFDs can be used on a cash covered basis to mitigate stamp duty when trading more actively; the cost benefits of
which have been outlined earlier in this brochure.
Highly leveraged – High Risk
In this instance a client might have the same £20,000 on a CFD account and want to speculate on Barclays utilising the
full level of leverage available; i.e. gaining exposure to £200,000 of Barclays shares. Should the investor anticipate the
correct movement in Barclays and the shares go up by 10% then a profit of £20,000 would be available to be banked.
If however the share price were to move against the investor and Barclays shares traded down 10% then the investor
would be running.
Managing Risks
When actively trading, risk management is crucial to success – without it an investor may find one mistake costs them
their total investment fund. Charles Hanover clients benefit from the full range of orders to assist in managing the
risks when trading:
- Stop loss orders; Limit the loss to a certain level subject to market pricing, can also be used to protect the
running profit on a trade.
- Guaranteed stop loss orders; Clients can choose to pay an “insurance premium” to buy a guaranteed stop
loss order ensuring that regardless of market conditions / pricing, they will be filled at the exact level their
stop loss was set at.
- Profit limit orders; Automatically bank profit when the target level is reached, allowing clients to set up
their trade in the knowledge that should it progress as anticipated the profit will be automatically banked.
As a simple overview, if a client is looking to risk 4% on a trade to make 8%, then even if they only call the market right
half the time they would see good progress on the account. When trading it is important to cut your losses short and
let your profits run, whilst also ensuing the level of risk per trade is balanced in line with the level of funds to trade
with. Should you want to discuss risk management and / or trading strategies further do contact one of our team.
8

7

Using Stocks as Collateral & Direct Hedging
Charles Hanover clients can either fund their accounts with cash to trade margined products, or they can use their
physical equities as collateral. The levels of margin available against shares varies from 75% for FTSE100 companies to
0% for some illiquid AIM shares. This facility ensures minimum idle cash in a portfolio. Rather than having cash sitting
on a derivative trading account clients could purchase blue chip stock, or transfer over their existing holdings, and use
them as collateral to trade margin instruments:
- Investor is holding £20,000 of Barclays shares
- 75% margin available against the shares = £15,000 can be used as margin
- If wanted to go long £10,000 of Lloyds, would use £1,000 of margin
- End result is the investor has £20,000 Barclays shares and £10,000 Lloyds as a CFD
Likewise if the above client envisaged a slight softening of Barclays share price and wanted to hedge their exposure to
profit from the pullback without selling out of their shares they could use the stock as collateral for a £20,000 short
CFD on Barclays:
- Investor is holding £20,000 of Barclays shares
- 75% margin available against the shares = £15,000 can be used as margin
- If wanted to hedge, then could short £20,000 of Barclays shares using £2,000 of margin
- End result is the investor has £20,000 Barclays shares and £20,000 Barclays short CFD
- If Barclays trades down then the client could bank the profit on the hedge whilst maintaining the
long position in the physical stock
For those looking to lock in gains in the next tax year at current prices, clients can hedge their exposure at the current
price and let the positions run until the new tax year closing out the physical and derivative trades in the new tax year.
Whilst CFDs can be used to hedge stock positions on different platforms, through running the 2 positions on the same
platform clients benefit from knowing where they are at a glance and not being forced into a margin call situation to
keep running the positions.
10

Risk Warning
The value of your investments will fluctuate and you
may get back less than your original investments. Please
ensure you understand the risk of any investment you
chose to undertake and seek independent financial advice
where necessary.
Trading Contracts for Difference (CFDs), Futures
and Spread Betting carries a high level of risk to your
capital, and is not suitable for all investors. Only speculate
with money you can afford to lose. Trading or placing any
bets can result in consumers incurring liabilities in excess
of their initial stake. Please ensure you fully understand
the risks, and seek independent advice if necessary.
Charles Hanover Investments Ltd is a trading name of
Equitrade Markets Ltd, a company authorised by the
FCA to provide advice on shares, spread betting, CFDs,
futures, options and rolling spot foreign exchange.
Before we can begin to send you our advisory
recommendations you must complete our online
application. We will also require you to open a trading
account with one of our third party preferred providers
and details of this will be sent to you upon completion of
the advisory application form. By completing, signing and
submitting the Charles Hanover Investments Ltd form
you are confirming that you have read and agreed to our
Terms of Business and Risk Warning.
Before trading Contracts for Difference, ensure you fully
understand the risks involved. These products may not be
suitable for all types of investor. Trading in Contracts for
Difference carries a high degree of risk and is generally
considered suitable only for the more experienced
investor. Leveraged products carry a high degree of
risk for your capital, and in some circumstances you
may be liable for a greater sum than your initial capital
invested. Past performance is not necessarily a guide to
future performance. Seek independent financial advice if
necessary. These products are suitable only for people
over the age of 18.
Information and analysis produced by Charles Hanover
Investments Ltd does not constitute a recommendation
or offer to make a transaction in any derivatives or
securities, and is intended to be general in nature. Charles
Hanover Investments Ltd is an trading name of Equitrade
Markets Ltd which is fully authorised and regulated by the
Financial Conduct Authority (FCA No. 441877).

Telephone:
+44 (0) 207 952 6350
Email:
info@charleshanover.co.uk
Address:
Charles Hanover Investments
2 London Wall Buildings
London Wall
London, EC2M 5UU
www.charleshanover.co.uk
Charles Hanover Investments Ltd is a trading name of Equitrade Markets Ltd
authorised and regulated by the FCA (FCA No. 441877)