Contracts for Difference or CFDs (contract for differences, for short), financial transactions carried out on stocks or stock indices on which the settlements are to be performed by the difference between the purchase price and the sale, and all this, moreover, without carrying out the physical delivery of the underlying asset (physical or securities indexes). Both parties agree to exchange the difference between the purchase price and the selling price of a financial asset.

 

In fact, the contract for difference (CFD) is only a contract between the investor and a financial institution (usually a broker or bank) for which this purchase securities on the stock market and finances the purchase, so the investor only to advance a small part of total investment. The contract for difference (CFD) is settled when the investor wants, getting the latter as profit the difference between buying and selling, as if it had bought the shares directly. In the case of bassists positions, the system is the same but what it does in this case is the financial institution and then sell the shares repurchased.

 

Example of operational actions against CFDs Contracts for Difference:

 

We want to invest in shares of BBVA 1000 to 10 euros each action. For that we open a contract with a broker, we will purchase the securities. We as investors do not have to pay 10,000 euros to the transaction costs on the stock exchange, but only a percentage ranging from 4% if the operation is intraday to 10% if the operation is open to final session. That is, we would be talking about that in a real investment of 10,000 euros, we should just pay the sum of 400 or 1,000 euros, which is similar to a financial leverage of the future on the Ibex 35 index.

 

Using the previous example, if the shares of BBVA rising to 10.10 euros and the investor wants to liquidate his contract for differences (CFDs), shall order the broker to sell 1,000 shares of BBVA. The benefit for investors is the difference between the purchase price, ie € 0.10 x 1,000 shares = $ 100. This represents a yield of 10% on the actual amount paid by the investor as collateral in the event that the investment has been kept open for more than a stock market session, becoming the profit from 25% in the case of that the operation was intraday.

 

Contracts for differences (CFDs) were created years ago by hedge funds, with their widespread use among European investors. As an example, saying that contracts for differences account for approximately 35% of the recruitment of the London Stock Exchange, with its widespread use among retail investors in that country.

 

 

CLASSES OF CONTRACTS FOR DIFFERENCES (CFD).

 

There are two classes or types of contracts for differences, namely: Contracts for Differences (CFDs) in which the issuer, bank or broker, sets a range of procurement and contracts for differences (CFDs) with direct access to the stock market .

 

In the first, the issuing institution, broker or financial institution, sets the range of sale prices and the trader, if you want to invest in them have to accept the terms of the issue. In this case the margin disappears and only the market price of a supply and demand with a price differential between the two was always to the exchange. The issuer gets the benefit of the differential between the price of your fork and the actual price of the stock market.

 

Typically, this type of contract dispute with the investor recruitment fork usually pay more than the bag if you want to buy and get less if you want to sell. In contrast, the issuers of CFDs with forks not charge fees for investment.

The CFDs with direct access to the stock market, causing an actual operation of the Exchange and the market depth that is used to recruit the same as the operational actions. When you buy a contract for differences, this will go directly to the stock market in the name of the issuing entity, which makes the transaction settlements differences (ie, the investor begins to settle differences in price, so a daily close of meeting). In this case, the sender gets its profit by charging fees, which, normally, in the case of CFDs are often quite high.

It is no easy choice. So we should look at case by case and see which is better. A very important parameter to consider is that we should always choose an issuer that does not offer the greatest variety of CFDs possible national and international shares and indices, as well as currencies and commodities (raw materials) and not to choose who can give us only the actions IBEX35, as this is a very liquid market and very diverse. We must not forget that the best guarantee that our investment is diversification.

  

COMPARISON OF CONTRACTS FOR DIFFERENCES WITH OTHER LIQUIDITY CFDs.

 

Contracts for Differences (CFDs) are futures, or options or warrants, but sharing some of those features.

 

With futures, warrants and options share a high degree of financial leverage, the possibility of opening up short positions and settlement of transactions daily. However they are more liquid and those that are exempt from expiration.

 

It is also a more liquid investment in shares with credit market. The guarantee is usually required in CFDs (5% or 10% depending on whether or not investment intraday sometimes more depending on the underlying asset) is less than that required of the credit sale of shares.

 

Also, playing in his favor the smaller size of the commissions of CFDs compared to investment in shares with credit market.

 

They are so obvious, finally, its many advantages to buying shares in cash, to combine the advantages of buying shares in the benefits of the future that any of the specialized media is already talking about a revolution in the world market for retail investment in Spain.

 

 

ADVANTAGES OF CONTRACTS FOR DIFFERENCES (CFD).

 

. Financial Leverage CFDs Contracts for Difference.

 

It's called leverage the possibility to finance purchases of certain assets without the need to have the money for the operation at this time.

That is, in this case, contracts for differences (CFDs) can do the same with less investment in shares of the capital we would need to do the same operation on the Exchange. In order to deal with contracts for differences (CFDs) is not necessary to pay the full value of the shares being bought or sold, but only the amount required to deposit as collateral. This guarantee is 10% of the actual value of the operation when the position is open at the end of the session. If the position is closed before the end of the meeting, the warranty is usually 5% of the cash value of the transaction. Sometimes, depending on the sector where the underlying volatility of the market and liquidity value, these securities may be higher.

 

As an example let's compare a purchase of 100 shares of BBVA shares or by buying contracts for differences (CFDs). In this course, we have bought in today at 10 euros for several days and sell such shares to 12 euros.

 

                                                With shares with CFDs

 

Purchase price of EUR 10 10euros

 

Price 12 euros 12 euros

 

2x100 shares gain 2x 100 = 200 euros = 200 euros CDFS

 

Initial actions 10x 100 = 2000 euros 10x 100x 10% = 200 euro guarantee.

 

Return on investment 20% 200%.

 

Of course we can see that thanks to the effect of financial leverage of the contracts for differences (CFDs) have obtained a profit ten times greater than if the asset had made the purchase the same number of shares. We can say that we have a leverage ratio of 10 to 1, ie, investing ten times smaller, we have obtained the same benefit with the purchase in cash.

 

Andalusia buy contracts for differences (CFDs) as a real transaction in the stock market, the CFDs issuer of the stock market is paying the full amount of the purchase of shares and, at the same moment that takes place the operation, issued a contract for CFDs investor and begins to settle differences in its daily account. If the investor bought maintains its position at the close of the meeting, the liquidation is daily (ie at the end of each session will be credited or debited from your account any gain or loss on your investment), the issuer is charged a commission equal to the reference [Euribor or Libor (12meses) + 2 or 3%] / 365 days on the total value of the purchased position to sitting. Ie the long positions (bought) the load broker to the investor the cost of the operation.

 

. Possibility of short positions in CFDs Contracts for Difference.

 

For the vast majority of investors in our country, used to invest solely in equities, the only way to get return on their investment through share purchases is hoping that its price rises. However, as with futures, the contracts for differences (CFDs) can also invest in a downward direction. That is, this product allows us to invest as much if the stock market goes up or down through the opening of what are called long and short positions.

 

It's called a long position in an asset purchase (or contract for future action) in the expectation that its price rise and make profit between the purchase price and the final selling price.

 

Called short position on the contrary, the sale of an asset (or contract for future action) in the expectation that its price down and make profit between the sale price and the repurchase price. That is, we're selling or future action, even without having bought before, and to close the open position, then repurchased those assets. If in the meantime the price has dropped, the gain difference between the price at which we sold and the price at which we repurchase.

 

This type of operation can be carried out with contracts for differences (CFDs), could benefit both the bull market and the bear market. In this case, the broker has an issuer of portfolio securities to cover themselves titles such sale against the market (Sino own titles available to cover that sale, the contract would not be CFDs). In this course, as the issuer is selling securities broker of their own portfolio, is receiving the full amount of the sale. Therefore to perform the operation sends a stock sale contract CFDs for the inverter and thereby becoming the movement of shares sold by differences in daily settlements in the account of that investor. Also, if this does not close the position at the daily closing of the meeting but maintained their investment (that is still sold or maintaining your short position) the issuer broker paid into the account of the investor, in interest, the amount equivalent to reference rate [Euribor, Libor or Libid (12 months) -2 or 3%] / 365 days on the total value of the position sold to open session. That means that investment will earn a little extra interest to the investor, regardless of any gain or loss that may be from his investment. That is, in short positions (selling) the broker of the investor pays to the financial interest earned as a result of the sale of securities.

 

 

Contracts for Differences (CFDs) also allows us to create investment strategies by hedge some or all of the securities that the investor has in its portfolio through long and short positions at a time.

 

It should be noted that in very exceptional and extreme circumstances, the broker issuer may limit the opening of short positions in any given value, eg in the case of not having its own portfolio of value sufficient to cover such a massive sale of those securities, and in case of takeover bids, mergers, etc, although the norm is that it can operate at low without any problem, even on days of high market volatility. This does not mean that investors have long positions open, ie they are purchased, will not be able to sell. Any investor taking a long position may open and close the position to sell without any restrictions and the prices were negotiated on the continuous market.

 

Liquidity Contracts for Differences (CFDs).

 

We stock liquidity to a market's ability to absorb reasonable quantities of stock for the purchase and sale without any drastic changes in stock prices. The title of a company that maintains a high turnover shareholder per day, in conjunction with the total number of shares will have a high liquidity. It is therefore a crucial parameter to carry out a stock investment.

 

A contract for difference has the same liquidity that the underlying (physical or securities indexes) on the stock exchange. Therefore, if you invest through Contracts for Difference (CFDs) on shares in highly liquid, eg Telefonica, BBVA, SAN, etc., we will ensure a high liquidity.

 

 

Closeouts daily CFDs Contracts for Difference.

 

Contracts for Differences (CFDs) are settled daily, ie at the end of each session of the market is debited or credited to each investor profits or losses of its operation. For a better understanding contemplate the following example:

 

Day 1: Buy 100 shares of Telefonica to 16 euros. A. The value close 15, 98.

 

Day 2: Do not perform any operation. Telefonica closes at 16.04.

 

Day 3: I sell half my position in Telefónica 16.05. At the close of the meeting is at 16, 10

 

Day 4: Close the 50 I have left to Telefonicas 16.07.

 

                                                WITH ACTIONS WITH DFDS Contracts for Differences

                                                                                                             

                                                                                                               Contract 100 CFDs at 16 euros.

Day 1: Disbursed 100 x 16 = 1600 Euros Settlement refusal - 2 euros.

                                                                                                               Guarantees 159, 80 euros.

 

                                                                                                               Clearance positive + 6 euros.

Day 2: no operations. Guarantees of 160.40 euros.

 

                                                                                                             

Day 3: Entrance 50 x 16.05 = 802, 50 euros + 3.50 Clearance positive euros.

                                                                                                               Guarantees 80, 50.

 

Day 4: Entrance 50 x 16 07 = 803, 50 EUR -1.50 EUR negative Clearance

                                                                                                               Without guarantees, as I closed the position.

 

Result Total: 802.50 + 803.50 = -1600 + EUR6 -2 + 6 = -1.50 + 3.50 + 6 euros

 

. You do not have the maturity CFD Contract for Difference.

 

Unlike the stock futures, stock options or the operation of credit markets, contracts for differences (CFDs) have no maturity. Consequently, the contract price difference is not influenced by the calculation of the value at maturity, as in the case of a futures contract or the loss of the option's value in the case of stock options. The price is the same as the action that is referred to throughout the life of the operation. There is no need therefore to change positions due to one another (such as futures contracts) if you desire to have an investment over a long period of time.

 

. Flexibility in operational CFDs Contracts for Difference.

 

An important feature of contracts for differences (CFDs) is its ease to buy or sell in any market condition. Also, we can use in any operational order, as if a normal purchase of shares in question to market conditions, limitations, with a stop loss, ect.

 

  

CONTRACTS FOR DIFFERENCES (CFD) and allocation of dividends or rights issue in a capital increase.

 

 

In the case of dividends, the investor contracts for differences (CFDs) holds all the economic rights of action. Therefore, it paid dividends and the amount for which he is the right of preferential expansion in the case of capital increase.

 

If, however, its market position in payment of the dividend is selling (short), action must be reduced by the amount that the dividend amount.

 

The realization of a capital increase by an undertaking would require the carrier to buyers on the same positions, participate in the expansion under the same conditions as other investors. Crediting an account of shares shall be made on the date that is collected under the conditions of enlargement.

 

Conversely, the investor who has an open short position (ie, it is sold), be reduced by corresponding number of shares under the terms of the expansion.

 

Also finally, we must note that the investor, holder of the Contracts for Differences (CFDs), andalusia not physically hold the titles of their own, may not use the political rights that derive from the action, such as the right to vote shareholder meetings.