The online stockbrokers in this section have been chosen because they combine competitive charges with some added extras for the more sophisticated trader. Among these added extras is the ability to deal in investments other than shares. These other investments include the following:
Contracts For Difference (CFDs): CFDs are a way of trading shares ‘on margin’, which means with borrowed money. Because of this ‘gearing’ factor, trading in CFDs is a high-risk activity and should only ever be tried by experienced investors.
A CFD is an agreement between a broker and an investor (you) to pay the ‘difference’ between the opening and closing price of a ‘contract’. You can go
‘long’ or
‘short’ with CFDs. This means you can ‘open a position’ by buying or selling; later you ‘close the position’ by selling or buying. This illustrates one of the advantages of CFDs- you can aim to make a profit from a fall in price as well as from a rise in price.
The value of a CFD will be very similar to the value of the share it is related to. The price of the CFD includes an adjustment for interest; when you buy, you are in effect borowing money and when you sell you are lending money. A CFD is a ‘synthetic equity’ position - whether you do well or not depends on how the underlying share performs BUT you do not own any shares when you own a CFD. However, whether you make a profit or lose money still depends on the movement of the underlying share because the value of your CFD tracks the value of the shares very closely.
For example: Say you buy ‘long’ a CFD for 5000 shares that have a current market price of £5. While you don’t actually own any shares, you have in fact taken a position on those shares that is worth £25,000 (Share price x No. of shares). If, in two weeks time, the underlying share price has risen to £5.50, your CFD would also have risen in value by a very similar amount, say to £27,500. If you were to close out your CFD at that price you’d have a gain of £2,500 (excluding any dealing charges).
But it would not actually cost you £25,000 to open up the above position. CFD trading is
margin trading. This means that you will normally be asked to put up 10-20% of the initial value of your CFD position. In this case, you would have gained control over a position worth £25,000 by putting up £2,500-£5,000. The rest of the money is put up by the broker, which is why you will pay some interest (because the price of the CFD is marginally lower than the share price) for each day that you hold a long position.
The ability to take a bigger position by using CFDs than you could if you had to buy the shares themselves is one of the primary attractions of CFD trading. It can lead to proportionately larger profits. However, it is also the reason why buying or selling CFDs should be considered a high-risk activity, as is any form of investing with borrowed money.
The gearing factor can of course work against you if you take along position and the price falls. If your margin is 10%, then a 10% fall in price will wipe out your deposit.
Your losses will continue while you keep your CFD position open. This is why most CFD traders use stop-losses to limit the risks.
If the underlying share price falls then your position is worth less than you paid for it. As you only put up margin – not the full value of the position – your broker will take your losses out of your margin on a daily basis. But most brokers require you to maintain the amount of
initial margin you put up at the outset, so, if your broker is reducing your margin to reflect your losses, you will need to keep putting more money in.
Your broker will continue to take money out of your margin on a daily basis, and you must continue to top it up – or close out the CFD by selling. If you keep the position open you may also have to put up
additional margin for added security. The longer you keep a losing position open the more you will lose.
Spread Betting is similar to CFD trading, and unlike CFDs, profits from spread betting are tax-free. But dealing spreads tend to be wider. Stockbrokers do not offer Spread Betting, which is the preserve of a number of specialist firms.
Foreign Exchange trading:Currency trading used to be the preserve of institutional investors, however some online stockbrokers now offer a forex trading facility to their clients. There are major differences between currency trading and equity trading. These include the following:
24-hour trading:Unlike the equity markets, the forex markets truly operate 24-hour a day.
Liquidity:The volume of trades executed in the currency markets is vastly higher than on stock exchanges, it is possible to find fair market prices for trades 24 hours a day, five days a week. This also means that spreads are low.
Volatility:The forex markets are highly volatile intra-day; these rapid swings in prices create trading opportunities for the experienced and sophisticated day trader.
Leverage:As with CFDs, forex traders can take leveraged positions using margin. It is possible to put up only 5% of a trade as margin. As with CFDs, this allows investors to control far bigger positions than they would otherwise be able to. Of course, this can bring both higher profits and heavier losses. This is why forex trading is only for sophisticated and experienced investors.
Go ‘long’ or ‘short’:Forex traders are not restricted to betting that a currency will rise; they can also bet against that currency (sell it short). This opens up the trades available.
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Our editor has chosen his top selections for experienced traders
