Share CFD

A contract for difference whose reference price is a single listed share. The size is stated as a number of shares, the result is the difference between the closing and opening prices multiplied by that number, and the other party to the contract is the broker rather than an exchange or another investor. Nothing is delivered at any point, and the contract can only be closed with the firm that wrote it.

Several consequences follow from owning no shares. There is no entry on the register, no vote and no dividend. Instead a dividend adjustment is applied on the ex-dividend date, credited on a long contract and debited on a short one, which keeps the contract economically level rather than paying a dividend. A corporate action such as a split or a rights issue is adjusted by the counterparty so that the exposure before and after is equivalent. Financing is applied for each night the position is held, and commission on share contracts is conventionally a percentage of the value traded rather than a charge per lot.

The margin arithmetic is where the instrument differs most from buying the share outright. Only a percentage of the contract's value is posted as collateral, while the difference is calculated on the whole of it, so a loss is measured against the full contract value, can exhaust the collateral entirely and is not limited to the amount deposited. A favourable move is measured on exactly the same basis and to exactly the same degree. Single company risk makes this concrete: a share can reopen far from where it closed after results, and a protective stop is a trigger rather than a promised fill price in that kind of move.

One further detail is missed often enough to be worth stating. A contract on a share quoted in another currency carries a second exchange rate into the result, because the difference is calculated in the share's currency and converted into the account's currency when it is realised. That conversion is a real component of the outcome and has nothing to do with the company.