Share CFDs: What are they and why trade them with Pepperstone?

Share Contracts-for-Difference (CFDs) allow active traders the ability to express a view on the direction of a share price, just as one would in physical shares.

However, if you have the risk tolerance and your strategy dictates then share CFDs can be a vehicle that can change your approach to trading shares.

Share CFDs replicate the underlying equity market and with Pepperstone you trade the underlying price directly from the exchange, just as you would with a share broker.

The trader can open and then close the trade at a time of his or her choosing, unlike options that do have an expiry date.

There are two core differences – share CFDs involve the use of leverage and the ability to short sell.

The guide to leverage

With a share CFD, a trader places a percentage of the face (notional) $ value of the position as margin (or deposit) – that level will be dictated by the broker and guided by the regulatory jurisdiction, as well as factors such as the company’s free float, market capitulation and volatility.

For example, the margin factor required to place a CFD on Tesla is 5%. For a $20,000 notional position (i.e. the number of shares * price) the client places $1,000 ($20,000 *5%) as margin.

The margin represents a buffer in case of loss, and you will need that level of capital to open the trade. It will also need to be a percentage of the equity (cash balance plus or minus running profits/loss) in the account. While you will pay commissions, just as would with a physical share – the main initial outlay is the margin, but this is a fraction of what you would place if trading physical shares.

A trader can decide to start with the notional amount he or she would typically buy with physical shares and then place a margin for the position.

Or, more commonly when a trader becomes familiar with the process, and he or she knows the margin rate then they can start by allocating an amount of margin to a position – say $500 – and apply the leverage to get to a notional figure and then see how many shares they can buy.

CFDs are a derivative

CFDs are a ‘derivative’ – they are predominantly used to speculate on the short- to medium-term movement of a share price – up or down. Or because you can short sell with ease, and profit from a move lower in a share price (my guide to short selling - https://pepperstone.com/en-au/market-analysis/short-selling-traders-open-world-opportunity/ they can be used very effectively to hedge a physical portfolio through a period of drawdown.

With a CFD you are involved with the movement of the price, but you are not a shareholder – you will not get an invite to an AGM. You will, however, receive the dividend amount if you’re long over the ex-dividend date – it will be paid as a cash payment to the account.

For people who are active in the equity market, consider themselves traders, and have a higher risk tolerance, CFDs could be a vehicle to explore the potential to trade equities.

Other advantages of trading share CFDs with Pepperstone:

Choice and opportunity - trade US and global equities all from one account
Risk management – utilise powerful risk management tools and sophisticated charting to manage your risk and position sizing like a pro.
No minimum commission – whereas some brokers would charge a minimum $30 for the round trip, we charge a fraction of this. This is great for higher frequency traders
Very low commission – 2c a share on US shares – for active traders this should reduce the drag that costs wear on portfolios
The guaranteed market price – some zero commission brokers will wrap their own spread to the market bid-offer spread – this is often not picked up by clients
The ability to trade all sessions – this means clients can trade the post-market session and the period when many of the marquee stocks report earnings. If news breaks don’t be left waiting for the market to reopen. Trade when the news breaks and react in real-time
The ability to go long and short with ease – there are no ‘borrow’ restrictions with Pepperstone, and clients can trade stocks long or short without restrictions
No currency fee – if buying (or selling) US share CFD and the account is in AUD or GBP most brokers would charge a high FX exchange fee – that can add up.