How Well Do You Know CFD Trading?

By City Index, PRNE
Sunday, January 23, 2011

LONDON, January 24, 2011 - Here are five of the most frequently asked CFD trading
( questions, answered.

1. What is a CFD?

CFDs, or Contracts for Difference, represent an agreement between two
parties (a buyer and a seller) to exchange the difference between the opening
price and closing price of indices, currencies, commodities and more. If the
difference between the two prices is positive, the seller pays the buyer. If
it is negative, the buyer makes a loss instead.

2. What are the origins of CFD trading?

CFD trading ( came about in the
early 1990s in London to allow professional traders to speculate on price
movements, with any profits made exempt from stamp duty. CFD trading is still
free from stamp duty today*. At first, CFDs were used primarily by traders
wishing to hedge their exposure to the London Stock Exchange. By 2000,
however, retail traders were CFD trading on everything from indices and
commodities to shares and currencies. Today, CFD trading providers such as
City Index ( offer more than 12,000 markets on
which to trade CFDs.

3. How does CFD trading work?

Like financial spread betting, CFD trading allows you to speculate on the
price movements of financial markets without ever actually owning the
underlying instrument. There is another similarity to financial spread
betting in that CFD trading is also a leveraged product. This allows you to
trade by paying only a small fraction of the actual value of the contract -
potentially magnifying both your profits and losses accordingly.

You can open a CFD trading position to speculate that a price will move
up or down, meaning that you can profit in a falling market as well as a
rising one. CFD trading platforms therefore quote a 'buy' and a 'sell' price
for every market, and you open a position according to the direction in which
you believe the market will move.

4. How do you hedge with CFD trading?

The fact that CFDs ( allow you to
short sell and therefore profit from falling market prices means that
investors often employ them as a 'hedging' tool for their portfolios. For
example, if you had a long-term portfolio that you wished to keep, but felt
that there was a short-term risk to the value of your investments, you could
use CFDs to offset a short-term loss by 'hedging' your position - that is,
opening an equivalent CFD trade in the opposite direction. By doing this, a
loss in your portfolio will be offset by a roughly equivalent gain in your
CFD trading, and vice versa, consequently enabling you to keep your portfolio
at roughly the same value regardless of market conditions.

5. What is the difference between CFD trading and financial spread

One difference between the two is that financial spread betting
( is only ever monetised in your
base currency (usually sterling), whereas CFD trading is monetised in the
underlying market currency (e.g. if you trade CFDs on a US exchange, then
your profits or losses will be realised in US dollars). Another contrast is
that any CFD trading gains you may make incur UK Capital Gains Tax, which
spread betting gains do not*.

The most important thing to remember is that financial spread betting and
contracts for difference ( trading
both carry a high level of risk, so you should always ensure you completely
understand them before committing your own money.

Learn more about CFD trading at

About City Index:

Today more and more individual traders are discovering the benefits of
derivatives, and many of them are discovering them through a City Index
trading platform.

As a group, we transact in excess of 1.5 million trades every month for
individuals in over 50 countries worldwide. We provide access to a wide range
of instruments including margined foreign exchange, contracts for differences
(CFDs) ( and,
in the UK, spread betting.

We constantly look to widen the range of assets we offer, improve the
performance of our platforms and expand the range of services we provide. The
result is that our customers benefit from innovative trading tools with
transparent pricing, competitive spreads, and a high standard of customer
service and support.

Spread betting and CFD trading are leveraged products which can result in
losses greater than your initial deposit. Ensure you fully understand the

*Spread betting and CFD trading are exempt from UK stamp duty. Spread
betting is also exempt from UK Capital Gains Tax. However, tax laws are
subject to change and depend on individual circumstances. Please seek
independent advice if necessary.

Contact: Joshua Raymond, City Index Group, Tel: +44(0)20-7107-7002,
Email: joshua.raymond[at]; Jonathan Smith / Alex Nekrassov, New Century Media, Tel: +44(0)20-7930-8033, Email: jsmith[at] / alexnekrassov[at

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