Answers And Questions Concerning Contracts For Difference Along With Dividends

Article Written By: Don Gragorian

There is often confusion about who owns the shares when trading in the derivative of CFDs; the owner of the shares will be the stock broker or brokerage agency. Whenever you trade Contracts for Difference you are actually doing something which is called a swap trade; this means that you are swapping the particular physical stock for a contract. When you make these positions, you're responsible for one hundred percent of the loss and one hundred percent from the gains but do not own the stock, nor have you got rights to the company. Sometimes the CFD trader will be able to collect dividends when they take a 'Rights Issue'.

When the trader has opened a long CFD position they've the potential to generate income dividends. These will typically be 90% of the pip and will happen when the position continues to be held when the stock goes 'ex-dividend' (XD), and will often have a few weeks to many weeks to be distributed. Let us say that the actual investor held the position on August 1 and then the share went ex-dividend on that date; and if the share paid 30p per share the actual dividend would be 27p.

Should the trader was holding a short position once the stock goes 'ex-dividend' they will have to pay the total amount out of their account. If the dividend is .20 pounds and the actual stock price was 8 pounds per share the actual price is going to drop to 7.80 pounds. The issue to note relating to this is that the trader is actually not sustaining a loss as is also paying out 20p for that dividend but are generating an income of 20p for the price drop, thus canceling each other out.

To clarify a little, not all CFD trading positions will produce dividends. For example if the ex-dividend date is on August 1 but you closed your position on August 3, you would be eligible to receive dividends, however, if you opened your position on August 3 you wouldn't be eligible for any dividends.

Ones CFDs broker will either credit your cash account or withdraw cash from your account based on the long or short positions. It is also important to realize that the dividends which are earned or lost using this derivative aren't what is significant; when the shares earn dividends it's more about the investment, whereas when you are opening positions with Contracts for Difference you are speculating.

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