Why Franking Credits are Important in CFD Trading

A common question people ask is ‘do I receive dividends when buying CFDs?’ The answer to this question is simple, ‘yes’. However, there are a few things to be aware of as CFDs are a derivative agreement between the CFD provider and the buyer or seller of the CFD. The holder of a CFD does not own the underlying equity over which the CFD is derived as such the management of dividends is slightly different to what most CFD traders would have become familiar with when trading shares.

Unlike ordinary shares, the dividends received by the holder of a long CFD position don’t have any franking credits attached to them. A franking credit is a tax credit offered by the company with the dividend, when it is paid to shareholders. Essentially the company over which the CFD is derived has paid a portion of tax on behalf of its shareholders. Fully franked dividends have a 30% tax credit attached. The concept of franking credits is peculiar to Australian companies.

When buying shares it is imperative to understand that in order to be entitled to dividend franking credits it’s compulsory to own the shares for 47 days which includes the dividend date. The formal requirement is 45 days but this doesn’t include the days the equities are bought or sold which increases the holding period by an additional two days. Despite franking credits are not attached to CFDs most CFD traders are not concerned as most are not long term buyers and do not hold their CFD positions open long enough to realize any real benefit.

CFDs traders can sell a CFD as easily as they can buy a CFD, selling a CFD without holding a long open position is known as short selling. It’s important to note that there's an obligation to pay a dividend to the CFD provider when a short sold CFD position is held over the ex-date. The ex-date is the date on which the seller, and not the buyer, of a stock will be entitled to the dividend.

It is essential to understand that when paying the dividend on a short sold position you might also be liable to pay the franked component of the dividend. The reason you may be liable to pay the franked component in addition to the confirmed dividend amount is because when your CFD provider hedges your short position in the market they were required to borrow stock from an owner of the shares, it is possible that they borrowed the stock to cover your short position from another Australian resident who is also entitled to the franking credits. Usually your CFD provider will try to borrow stock from offshore where the owners of the stock have no use for franking credits. You should ask your CFD provider prior to short selling a CFD over dividend periods as you may find that you are also liable to pay the franked component of the dividend.

There are a number of trading strategies CFD traders can utilize over dividend periods, one of these strategies is known as dividend stripping. Dividend stripping is the purchase of equities prior to a dividend being paid, and the sale of those stocks after that payment. Understanding dividends and how you can trade CFDs around dividend periods is vital when developing your CFD trading strategy.

Article Source: http://gamblingarticlessite.com

Pradeep Rathsan is an experienced CFD trader. Pradeep started trading CFDs 10 years ago, originally in the UK and now in Australia. Pradeep lectures novice traders around Australia. He has published several books and guides on CFD trading

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