Index and share CFDs

An index CFD does not give you a share in any company. It is an agreement with your broker to exchange the difference in the value of a basket of companies between the time you open the position and the time you close it. The basket might be thirty large American companies, or a group of European firms, or a set of banks. You never own the underlying shares. You settle in cash, in naira, through the broker's platform.

Because no shares change hands, the broker has to charge you for the service in other ways. The spread is the gap between the buying price and the selling price, and you pay it the moment you open. If the spread on a US30 CFD is 4 points and the broker quotes $1 per point per lot, then 0.10 lots costs you 0.10 × 4 × $1 = $0.40, which is about ₦640 at ₦1,600 to $1. That charge is taken before the market moves at all.

There is also overnight financing. If you keep the position open past the broker's daily cut-off, the broker charges or credits interest based on the value of your position. The rate varies by broker and by the instrument, so you cannot assume a fixed figure. A position held for one night might cost a few hundred naira; held for a month, the same position can cost more than the move you were hoping for.

The basket also rebalances. Index providers add and remove companies from time to time, and the weight of each company changes with its market value. Your CFD price follows the basket after the change, not the basket you studied last month. Check the index fact sheet if you plan to hold for more than a few days.

A share CFD tracks one company. If the company reports poor earnings, the price can fall sharply in minutes, and no other company in the index cushions that fall. The spread on a single share CFD is usually wider than on a major index, because fewer people trade it. A spread of 0.5 per cent on a ₦100,000 position is ₦500, paid on entry.

Dividends work differently from owning the share. When a company pays a dividend, the share price usually drops by roughly the dividend amount on the ex-dividend date. If you are long the CFD, the broker normally credits you an amount close to the dividend. If you are short, the broker normally debits you. The exact amount and timing vary by broker, and some brokers adjust for withholding tax.

Corporate events can change your position without your agreement. A share split multiplies the number of shares and divides the price, so your CFD quantity is adjusted to keep the value the same. A merger may close the position at a price set by the broker. The broker's corporate-action policy explains what happens, and you should read it before you hold a share CFD through a known event.

An index CFD follows the hours of the exchange that publishes the index. US indices close in the evening Nigerian time and reopen the next day. A currency pair like EUR/USD trades almost around the clock from Monday to Friday. If you leave an index CFD open overnight, you are exposed to whatever news arrives while the market is shut.

When the market reopens, the price may start far from where it closed. This is a gap. A stop loss is an instruction to close your position when the price reaches a level you set. If the market gaps past that level, the stop loss becomes a market order and fills at the next available price, which can be worse than the level you chose. The gap is not a broker error; it is how a closed market behaves.

The same applies to share CFDs. A company can release results after the close, and the share price may open ten per cent lower. A stop loss set at five per cent below your entry would not protect you at five per cent. This is why position size matters more on instruments with closing hours than on currency pairs that trade continuously.