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FAQs

How do some brokers offer commission free dealing?
They take something out of the dealing spread when executing the trade. They offer "commission free" by making their own spread around the underlying price.

How long can I hold the position?
Basically you can hold a position for as long as required, however in certain circumstances such as a takeover you could be forced to close out a position.

What is Pair Trading?
It is a market neutral position which is established by shorting one stock while simultaneously buying another. Spreads are usually traded between two stocks in the same business sector or where there is a significant cross holding or correlation. For example you might be more confident about Halifax's (HFX) performance compared to Abbey National (ANL) and bearish about the market generally. If you purchase HFX and sell ANL as long as HFX outperforms ANL you should make money.

Example of a Pairs Trade:
You wish to profit if Halifax's (HFX) out performs Abbey National (ANL) and you have no opinion about the market direction.

The current market prices are HFX £6.00 and ANL £8.00

This could be expressed as a ratio of 6/8 or 0.75. In other words one HFX is equal to .75 ANL. If you buy HFX and sell an equivalent in value of ANL you should profit as long as the ration improves. eg:

- Buy a CFD on 10,000 HFX shares at £6.00 (value £60,000)
- Sell a CFD on 7,500 ANL shares at £8.00 (value £60,000)

Some time later HFX is trading at £5.60 and ANL £7.00. The new ratio is .80 and suggests that you have made a gross profit which could calculate the profit as follows:

-Buy 10,000 HFX at £6.00 sell at £5.60 generating a loss of £4,000
-Sell 7,500 ANL at £8.00 buy back at £7.00 generating a profit of £7,500
-Gross profit £3,500

If the position were to move against you then you would incur a loss which could be in excess of the funds deposited.
 


Futures, CFD, Margined Foreign Exchange trading and Spread Betting carries a high level of risk to your capital. A key risk of leveraged trading is that if a position moves against you, the customer, you can incur additional liabilities far in excess of your initial margin deposit. Only speculate with money you can afford to lose. Futures, CFD, Margined Foreign Exchange trading and Spread Betting may not be suitable for all customers, therefore ensure you fully understand the risks involved and seek independent financial advice if necessary.

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