# Negativity towards CFDs



## tom82 (26 March 2012)

Why are so many people negative towards CFDs?


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## sinner (26 March 2012)

* Force you to buy at the ask and sell at the bid (which is wider than a real market)
* Not a real market
* No "real volume" and/or depth of market outside of ASX 
* Silly margin rules.
* Arbitrary contract exposure. It's impossible to run some trading strategies using the CFD brokers since they choose which contracts they will allow traders to trade. For example right now the options on XJO in IGMarkets are only Daily and June options! Good luck trying to run a 6 month option without it listed. Why can't I buy front month VIX and sell back month VIX or vice versa?


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## Vixs (26 March 2012)

tom82 said:


> Why are so many people negative towards CFDs?




*Probably a large part ignorance of what they are and how they work.

*The fact that they are not an income or resource producing asset when you lay the money down, but a 'bet' that could amount to a loss. e.g. Buying direct shares means you hold an actual stake in the company, if they go south and you don't have risk management practices in place, you are at least left holding a stake in a company, albeit at a value now less than what you paid. If your CFD's go against you, you have less money than you started with and you still own nothing.

*The fact that they are an instrument of no actual value to the productivity of the world. If no CFD's were written today, the only thing that would change is that...there would be no CFD's written today. There would be no more or less food, building materials or knowledge.

*They have significant downside potential to the ill informed and prepared. That would be a very large proportion of investors, right?

I understand they are just another instrument used to make money, but to me it's the same argument that people use to argue against residential property investment. It's an investment in a non-productive 'asset'. There might be profit(loss) to be made there, but you're only swapping bits of paper with other people/institutions like yourself. The market could disappear overnight and nothing of value to humans in general would be lost.


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## tinhat (26 March 2012)

CFDs are about the same as placing a bet with a book maker.


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## Trembling Hand (26 March 2012)

Vixs said:


> *Probably a large part ignorance of what they are and how they work.




Actually that may be true but conversely I know them inside and out. I doubt anyone here has placed more CFD trades than me BUT I greatly dislike them.

They are very very very rarely the best instrument to place a given trade. Huge hidden cost. That suck in newbies with cheap margin rates and "free brokerage".

The only trade I can see them of being use is an equity short on the Aus market due to the lack of available shorting stock to retail traders. Virtually every other CFD instrument cost you way way more.


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## tom82 (26 March 2012)

If you dont like them, why trade them?



Trembling Hand said:


> Actually that may be true but conversely I know them inside and out. I doubt anyone here has placed more CFD trades than me BUT I greatly dislike them.
> 
> They are very very very rarely the best instrument to place a given trade. Huge hidden cost. That suck in newbies with cheap margin rates and "free brokerage".
> 
> The only trade I can see them of being use is an equity short on the Aus market due to the lack of available shorting stock to retail traders. Virtually every other CFD instrument cost you way way more.


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## tom82 (26 March 2012)

What do you say about forex then?

CFDs and forex are similar.

All markets have potential downside.





Vixs said:


> *Probably a large part ignorance of what they are and how they work.
> 
> *The fact that they are not an income or resource producing asset when you lay the money down, but a 'bet' that could amount to a loss. e.g. Buying direct shares means you hold an actual stake in the company, if they go south and you don't have risk management practices in place, you are at least left holding a stake in a company, albeit at a value now less than what you paid. If your CFD's go against you, you have less money than you started with and you still own nothing.
> 
> ...


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## Trembling Hand (26 March 2012)

tom82 said:


> If you dont like them, why trade them?




Back in the old days (2004-2008 : ) when they had customers belting down their door throwing money at them left right and centre you could trade any size you wanted. The great thing about that was that you could buy huge position sizes without having to worry about effecting the underlying market.

Anyone who could rapidly trade with some skill would have an advantage of getting execution mostly when you wanted.

Now they have tightened the game up to not only squeeze the skilless punter but slow down execution for anyone profitable. End result its not worth trading it if you can trade and if you cannot your accounts is soon in their bank and you're none the wiser.


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## skc (26 March 2012)

tinhat said:


> CFDs are about the same as placing a bet with a book maker.






sinner said:


> * Force you to buy at the ask and sell at the bid (which is wider than a real market)
> * Not a real market
> * No "real volume" and/or depth of market outside of ASX




That is not true when it comes to DMA CFD's for equities. CFD's origin started with spread betting in the UK and hence the connotation of betting remains. But with DMA all orders are placed into the market, you can buy at the bid (i.e. join the queue) or sell at the ask, and the underlying market volume is your volume.

OTC CFD's for futures and FXs are different. They serve exactly the same purposes (or there lack of) as the real futures and FX market, except with the sort of short fall and hidden costs that are talked about. 

I am not negative towards them, and if anything, plenty of beginners trade OTC products which makes the CFD provider more profitable and less likely to bankrupt... 



Trembling Hand said:


> The only trade I can see them of being use is an *equity short on the Aus market *due to the lack of available shorting stock to retail traders. Virtually every other CFD instrument cost you way way more.




They are the best instrument out there for pairs trading with the shorting and leverage. 



Vixs said:


> I understand they are just another instrument used to make money, but to me it's the same argument that people use to argue against residential property investment. It's an investment in a non-productive 'asset'. There might be profit(loss) to be made there, but you're only swapping bits of paper with other people/institutions like yourself. The market could disappear overnight and nothing of value to humans in general would be lost.




The same can be said to many other bits of financial instruments in the world. The only real instruments that result in real change in production are primary market activities - IPOs, capital raisings, debt issuance. All secondary markets (share market, bonds market) are there to support the primary market but they don't directly result in change in production.

I guess on one hand I don't disagree with you. But on the other hand, since it is my instrument of choice - I'd hate to see it go / get severely restricted for the above reasons.


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## blue0810 (26 March 2012)

tinhat said:


> CFDs are about the same as placing a bet with a book maker.




I can’t  see that way .
I use quite often DMA CFD / ASX CFD or  just  Shares to go  long /short . it depend  of  my particular situation.


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## pixel (26 March 2012)

I use CFDs frequently as a hedge = insurance against too big a drop if, for one reason or other, I want to hold on to the mother stock for a few more days.
Of course, if the provider "doesn't do" the stock I'm after, or won't cover the downside, there's little I can do about it. But then I don't fret or blame the CFDs - what's the point?

I also like CFDs to the long side for a quick swing trade, using the leverage factor to get a few extra profits during a day when not much else is happening. So what if the Market Maker charges a few extra points above the spread: it still leaves enough upside for me - provided I get the direction right. Take an example: On March 16th, CVN moved from 11.5c to 13c; at the best respective time, m/depth had 11c bid, 13c offered, meaning realistically a buying opportunity at 11.5c, a sell at 12.5c.
So, I can either trade 100,000 on the physical market, which ties up $11,500 + $20 brokerage, profit $1,000 minus twice the brokerage, say $960.
Or I trade 100,000 CFDs at 25% margin, which ties up $2,885 and nets $920 profit.

Is it a bet? Is it a trade? Which is which? What's the difference? To me, the difference is $40 less profit for a quarter the capital outlay. Or, if we must split a rabbit: $40 additional loss for a quarter the capital.


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## Trembling Hand (26 March 2012)

pixel said:


> I use CFDs frequently as a hedge = insurance against too big a drop if, for one reason or other, I want to hold on to the mother stock for a few more days.
> Of course, if the provider "doesn't do" the stock I'm after, or won't cover the downside, there's little I can do about it. But then I don't fret or blame the CFDs - what's the point?




Are you kidding?



pixel said:


> I also like CFDs to the long side for a quick swing trade, using the leverage factor to get a few extra profits during a day when not much else is happening.



Are you kidding?



pixel said:


> So what if the Market Maker charges a few extra points above the spread: it still leaves enough upside for me - provided I get the direction right.



Are you kidding?



pixel said:


> To me, the difference is $40 less profit for a quarter the capital outlay. Or, if we must split a rabbit: $40 additional loss for a quarter the capital.



 You really are kidding??


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## pixel (26 March 2012)

Trembling Hand said:


> Are you kidding?
> 
> Are you kidding?
> 
> ...



Thanks for your well-presented and reasoned disapproval. Let me answer in kind:

 no.

no.

no.

no.


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## tinhat (27 March 2012)

skc said:


> That is not true when it comes to DMA CFD's for equities. CFD's origin started with spread betting in the UK and hence the connotation of betting remains. But with DMA all orders are placed into the market, you can buy at the bid (i.e. join the queue) or sell at the ask, and the underlying market volume is your volume.




Thanks - I'm ignorant of DMA CFDs. I'm reading up on them now.


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## Trembling Hand (27 March 2012)

pixel said:


> Thanks for your well-presented and reasoned disapproval. Let me answer in kind:
> no.
> no.
> no.
> no.



 I'd love to follow up my well "reasoned disapproval" because there is a lot in your post i don't understand but will be a bit busy today. So for a start I would love to see an example of how you can,


> I also like CFDs to the long side for a quick swing trade, using the leverage factor to get a few extra profits during a day when not much else is happening.



 without completely blowing you position sizing.


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## pixel (27 March 2012)

Trembling Hand said:


> I'd love to follow up my well "reasoned disapproval" because there is a lot in your post i don't understand but will be a bit busy today. So for a start I would love to see an example of how you can,
> without completely blowing you position sizing.



 well, at least we're getting to a stage where I can rationally reply:
Firstly, I don't "blow position sizing", I merely adjust the calculation and set the stop loss accordingly. If I can't see a rather safe way to stop out for, say, under 5c loss and don't want to risk more that $500, I'll limit the position to 10,000. Needless to say, I won't take the trade if the risk outstrips the potential reward.
Secondly, I watch the trading action not on the Market Maker's platform, but on my MA and/or Pulse in real time ticks.
And finally, I pick a stock that I know trades "rather predictably" by my analysis. My current ratio is one stop-out in every six trades.


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## yrebrac (27 March 2012)

Why are people so negative towards CFDs?
Lol, see my new post https://www.aussiestockforums.com/forums/showthread.php?t=24539


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## pixel (27 March 2012)

yrebrac said:


> Why are people so negative towards CFDs?
> Lol, see my new post https://www.aussiestockforums.com/forums/showthread.php?t=24539



 Commiserations, yrebrac: that sounds like you've been shafted alright. 
So, obviously not all CFD providers are alike.

fwiw, I have an account with CMC and in 10 years haven't had an experience like that. 
Maybe I'm just lucky...


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## yrebrac (27 March 2012)

pixel said:


> Commiserations, yrebrac: that sounds like you've been shafted alright.
> So, obviously not all CFD providers are alike.
> 
> fwiw, I have an account with CMC and in 10 years haven't had an experience like that.
> Maybe I'm just lucky...




Thanks Pixel, I am going to get to the bottom of it. It may just be a liquidity issue in the end in which case there's still a lesson to learn. For the record I haven't had an issue trading the equity CFDs (RIO etc).


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## Trembling Hand (28 March 2012)

pixel said:


> Firstly, I don't "blow position sizing", I merely adjust the calculation and set the stop loss accordingly. If I can't see a rather safe way to stop out for, say, under 5c loss and don't want to risk more that $500, I'll limit the position to 10,000.




But that to me is the point that doesn't make sense.

You have $100,000 capital. You risk 2% per trade = $2000

stop at 5 cent adverse move is 2000/0.05 = 40,000 shares held. How does do you arrive at,



> using the leverage factor to get a few extra profits during a day when not much else is happening.


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## pixel (28 March 2012)

Trembling Hand said:


> But that to me is the point that doesn't make sense.
> 
> You have $100,000 capital. You risk 2% per trade = $2000
> 
> stop at 5 cent adverse move is 2000/0.05 = 40,000 shares held. How does do you arrive at,



 If that's your problem: the discrepancy between examples - that's easily explained.
They're examples only, unrelated to each other and especially unrelated to my personal account balances.
Ignore the $2000. I calculate the position from the difference between my buy price and the stop level (which CMC let me set to a stated $ amount anyway). That's where $500 risk over 5c potential loss came to determine that I could buy 10,000 shares. That example had nothing to do with CVN (where I wouldn't dream of a 5c lower stop); neither does it give you any clue about the size of my account balance - be it with CMC or all my trading accounts put together. 

*I meant to explain the method. Not my personal circumstances.*


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## Trembling Hand (28 March 2012)

pixel said:


> If that's your problem: the discrepancy between examples - that's easily explained.
> They're examples only, unrelated to each other and especially unrelated to my personal account balances.
> Ignore the $2000. I calculate the position from the difference between my buy price and the stop level (which CMC let me set to a stated $ amount anyway). That's where $500 risk over 5c potential loss came to determine that I could buy 10,000 shares. That example had nothing to do with CVN (where I wouldn't dream of a 5c lower stop); neither does it give you any clue about the size of my account balance - be it with CMC or all my trading accounts put together.
> 
> *I meant to explain the method. Not my personal circumstances.*




Pixel I don't care about your account size. Just wondering if you say you use the extra leverage of CFDs how do you do it? To use extra leverage you have to increase position size. 

If you increase position size you increase what % you are risking of your account OR reducing your stop size. Isn't that correct?


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## pixel (28 March 2012)

Trembling Hand said:


> Pixel I don't care about your account size. Just wondering if you say you use the extra leverage of CFDs how do you do it? To use extra leverage you have to increase position size.
> 
> If you increase position size you increase what % you are risking of your account OR reducing your stop size. Isn't that correct?



 Forget the 2% or whatever rule you want to apply to calculate the risk you're willing to take. Just assume for this demo that I am prepared to risk the loss of $500 for a trade that has either a much higher upside potential, or a very high probability of being profitable.
The $500 determines the position size. The margin determines how much of my cash I have to put up to secure the position. If I buy outright, it costs me 100% of the entry level; if I buy a CFD at 25% margin, it costs me 25%. *In either case, the stop loss will limit my absolute risk at $500.* 

Now assume the share gains 10%. If bought outright, that's 10% profit on capital employed. Traded via the 25%-margined CFD, it's 40%. 
PS: *In either case, I most definitely make the judgment whether the expected return (expectancy% times target) is worth the ($500) risk before I even open the order pad.*


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## Trembling Hand (28 March 2012)

pixel said:


> Forget the 2% or whatever rule you want to apply to calculate the risk you're willing to take.
> 
> 
> 
> Now assume the share gains 10%. If bought outright, that's 10% profit on capital employed. Traded via the 25%-margined CFD, it's 40%.






With that logic you should sell a weekend trading course for $5000 a pop!


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## zac (28 March 2012)

I trade shares on the ASX and CFD's on the US markets.

It seems like there is a difference in how CFD's on the ASX are handled from reading this thread.
My thoughts on CFD's are that they are great as long as you respect the leverage.

Im guessing through this thread that the ASX CFD's arent like trading shares but with leverage.
Ive bought and sold heaps of CFD's on US markets and never had a problem. Spread and prices are a direct mirror of share prices.

Having a reputable broker helps too.


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## pixel (28 March 2012)

Trembling Hand said:


> With that logic you should sell a weekend trading course for $5000 a pop!



 I respect your right to hold a different opinion.
But I find your pigheadedness and arrogance obnoxious and offensive.
No further comment.


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## Trembling Hand (28 March 2012)

pixel said:


> I respect your right to hold a different opinion.
> But I find your pigheadedness and arrogance obnoxious and offensive.
> No further comment.




Yeah mate thats fine. But you have shown with the above example that you don't use "extra leverage" as you original stated. All you are now claiming is an extra "return on margin". Which is an absolutely pointless stat unless you are choosing to blow sensible position sizing rules willingly or through incompetence.

Either way the leverage is often one of the main selling points of CFDs with the example like you have just given. But its BS. You shouldn't take a larger position as it just going to blow you up.


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## pixel (28 March 2012)

zac said:


> I trade shares on the ASX and CFD's on the US markets.
> 
> It seems like there is a difference in how CFD's on the ASX are handled from reading this thread.
> My thoughts on CFD's are that they are great as long as you respect the leverage.
> ...



 +1 zac
I've heard (and in my "learning days" been the object of) some shockers by not so reputable brokers. Learned from the experience and moved on. 
I don't think there are differences between countries to the extent that ASX CFDs have been reported here. Most likely, those were also the result of glitches, to be blamed on brokers rather than the location of the underlying motherstocks.
CMC let me trade Europe, US, Australia - all at very reasonable spreads. And as we seem to agree from the outset: You have to know the conditions, risks, and potential outcomes, and you need a Plan B. Adjusted paradigms and calculations.
*Ignorance and lack of discipline will prove lethal far more quickly with leveraged products than straight trades.*


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## Trembling Hand (28 March 2012)

By the way the only two selling points of CFD leverage that I can see that make sense on a risk basis are,

1. Some instruments you can still stick to your 1-2% rule and not have the total capital to cover the full position. Like index trades, FX, Commds etc.

2. To take more positions spread over different instruments while still sticking to  your 1-2% rule.


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## skc (28 March 2012)

From my perspective, CFD's leverage allows me to have less cash sitting (or potentially idling) in the account to support the same trading activity.

Say my trading capital is $100k. With direct shares I need the full amount in my broker account, while with CFD's I only need say $25k in my CFD account to support the same position size. The remaining $75k can go sit in a online high interest savings account. Yes you pay interest on the CFD long positions and that offsets the interest income from the online savings account. But it depends on how often you have positions open (e.g. if you only day trade then there is no interest on any CFD positions). This can potentially add 4% return over the year compared to having all $100k with your CFD provider. 

The other factor is counterparty risk - you'd feel quite happy (or a lot less stressed) when your CFD provider goes bankrupt and you only have $25k in there instead of $100k.

Another reason to use CFD's leverage is to allow more number of positions than otherwise. This however needs to be treaded carefully in terms of portfolio heat and correlation between positions. With pairs trading the correlation between position is pretty low so CFD's leverage is ideal. 



zac said:


> Ive bought and sold heaps of CFD's on US markets and never had a problem. Spread and prices are a direct mirror of share prices.
> 
> Having a reputable broker helps too.




I thought CFDs are not allowed in the US. Although there Australian providers who offer CFDs over US shares.


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## zac (28 March 2012)

Hey T/H,
What are your thoughts on people who use CFD's but then Hedge their downside risk? ie eliminate losses to only the cost of insuring/hedging the position?

Ive just noticed some analysts mention protective puts are used against their positions.


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## zac (28 March 2012)

skc said:


> I thought CFDs are not allowed in the US. Although there Australian providers who offer CFDs over US shares.




Thats just for US residents isnt it? I know CFD's are traded heavily on the American markets otherwise, by foreigners.

The ban on CFD's there I beleive is to protect their options market.


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## Trembling Hand (28 March 2012)

zac said:


> Hey T/H,
> What are your thoughts on people who use CFD's but then Hedge their downside risk? ie eliminate losses to only the cost of insuring/hedging the position?
> 
> Ive just noticed some analysts mention protective puts are used against their positions.




Not sure of the exact setup you are referring to. But it would still be cheaper to use shares and options wouldn't it?


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## zac (28 March 2012)

Trembling Hand said:


> Not sure of the exact setup you are referring to. But it would still be cheaper to use shares and options wouldn't it?




Buying stock, ie buying $100,000 of BHP CFD's @ $35 each, then using protective puts at a 35 strike to hedge the downside risk.

Assuming margin is 25% you are controlling $100k using $25k with no downside risk + cost of your puts.

The only costs would be interest + cost of options.


I personally dont like the idea of using CFD's with long term investments. But im keen to hear other persons views.


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## McLovin (28 March 2012)

zac said:


> I personally dont like the idea of using CFD's with long term investments. But im keen to hear other persons views.




No franking credits. Pretty big drawback to long term holding.


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## zac (28 March 2012)

McLovin said:


> No franking credits. Pretty big drawback to long term holding.




LOL good point, I should have used an example of a stock that doesnt pay Dividends hehe. Such as AAPL ................ oh hang on ......


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## Trembling Hand (28 March 2012)

zac said:


> Buying stock, ie buying $100,000 of BHP CFD's @ $35 each, then using protective puts at a 35 strike to hedge the downside risk.
> 
> Assuming margin is 25% you are controlling $100k using $25k with no downside risk + cost of your puts.
> 
> The only costs would be interest + cost of options.



Its still more expensive than a straight share + oppy trade. As for the mech. of the option hedge it seems  a pretty expensive hedge as well but maybe one of the oppy guys can comment.

But again my main problem with it is that peoples angle is always how little margin they need to control a huge position. Its BS. Huge position needs huge account or you are a :cowboy:

In my "pigheadedness and arrogance obnoxious and offensive" not so humble opinion


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## banco (28 March 2012)

zac said:


> Thats just for US residents isnt it? I know CFD's are traded heavily on the American markets otherwise, by foreigners.
> 
> The ban on CFD's there I beleive is to protect their options market.




Don't think it's to protect their options market.  US has some surprisingly tough regulations with regards to retail traders (ie pattern day trader rule) and retail traders seem to be where the market is for cfds.


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## Trembling Hand (31 March 2012)

ROLL-UP! ROLL-UP!!





Why is this a selling point for anyone other than a clueless @#%&wit?

Who exactly are they selling this rubbish to? 1% margin down to 0.5%


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## zac (31 March 2012)

Trembling Hand said:


> ROLL-UP! ROLL-UP!!
> Why is this a selling point for anyone other than a clueless @#%&wit?



True hey.
There are some brokers that advertise 400x and even 800x.
What kinda fool plays with fire like that.


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## skyQuake (31 March 2012)

zac said:


> Buying stock, ie buying $100,000 of BHP CFD's @ $35 each, then using protective puts at a 35 strike to hedge the downside risk.
> 
> Assuming margin is 25% you are controlling $100k using $25k with no downside risk + cost of your puts.
> 
> ...




Why not just buy calls instead if you're worried about downside? Esp in this low vol environment


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## cynic (13 April 2012)

pixel said:


> ...
> I've heard (and in my "learning days" been the object of) some shockers by not so reputable brokers. Learned from the experience and moved on...




+1

Recently a friend after having a dissatisfying experience with his provider asked me to check into the details of services offered by my provider. Whilst searching for the requisite information on my provider's website I discovered the following statement buried in the fine print:
.







> As a part of our market risk management, we may take the opposite side of your trade.



This would seem to suggest the potential for conflicts of interest to arise in the provider/client relationship. (i.e. is your CFD provider likely to accept the loss on your profitable trades after taking the opposite side?).

Needless to say I am now being doubly vigilant and am prepared to change to another provider in the event of any unsatisfactory arisings.


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## Trembling Hand (13 April 2012)

cynic said:


> > As a part of our market risk management, we may take the opposite side of your trade.
> 
> 
> 
> ...




Mate if they are a MM CFD they ALL take the other side. Why would they pass it on to the market or hedge when they expect you to lose.


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## markforex (17 June 2012)

Trembling Hand said:


> Mate if they are a MM CFD they ALL take the other side. Why would they pass it on to the market or hedge when they expect you to lose.




People have wisened up and now realized how CFD brokers really make their money and thats from their clients losses. Its sad but true, just pick up an magazine and you will see gloss adverts from the brokers in question. 

The only real choice is to either go with a DMA CFD broker who passes on all positions into the market or trade the shares themselves. 

Thats my 2cents anyway. The choice is always yours.


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## Smurf1976 (17 June 2012)

If my trades lose, they keep the money. That's the business model - most customers lose, and they know it. No different to a casino.

Also, just like a casino, anyone who makes a consistent profit may find themselves somewhat unpopular, especially when it comes time to withdraw funds from the account.

I made the mistake of using one of these companies some years ago. In hindsight, it ought to have been obvious. Deposit money anytime I liked via electronic means. Fill out some forms, send emails and wait for processing if I wanted to withdraw. Pretty obviously they aren't expecting too many withdrawals, and are manually keeping a watch on anyone who does make a profit.


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## zac (17 June 2012)

Sounds like some people here have really been screwed over with CFD's.
I use them but havent had any surprises with them as such.

I think the broker I use tho is different to most others. The spread is the same as with stocks and I know upfront what the brokerage fee is.
Only thing I really have to worry about is interest and on American equities its not much.


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## OGRooney (26 July 2012)

tinhat said:


> CFDs are about the same as placing a bet with a book maker.




If the day comes where bookies let people place bets after the post and win 500 times their punt on a 2 dog race I'll throw this damn computer out the window and head to the track, but for now I'll stick to trading breakouts


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