# CFD investing



## itsmejasong (17 April 2009)

Hi guys just wanted your opinion on a possible investing strategy I have. 

Basically I have a bit of cash about 15 grand, going to take a personal loan of 35grand to make a total of 50 grand.

With this equity I'm thinking of leavering it up using cfds to buy blue chip companies (WPL, BHP) at a margin of 10%. 

There is alot of risk with cfds and to manage this I will have several buy packet (approx $5000 / packet,  unleveraged ) and buy it over a minimum of 3 months spreading the risk. To hard to pick the bottom lol

I will also not use to total 50grand only 35 grand, and use the 15 grand for stop losses and buffers, margin calls etc. Plan to hold the shares for about a year or so as long as I can meet both interest repayments, i.e. personal loan & cfd interest. I have a stable job and wont loose it (government contracts) so thats not a problem.


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## nomore4s (18 April 2009)

You're obviously a newbie so I will take it easy on you.

Are you f-ing crazy?

While I think now is the time to start buying small parcels of dividend paying quality stocks, *now it not the time to be leveraged to the eyeballs. *

Firstly a couple of problems.

CFDs are very expensive because as the stock prices goes up in value so does the interest charge.

Do you understand what makes CFDs risky? It is the excessive leverage, and you are compounding this by using borrowed money.

There is a very real risk that the market will either trade sideways or continue to trend down for the next year - meaning you could end up paying a sh!tload of interest for sweet FA return or even a loss.

I'm not allowed to offer any financial advice but imo there are better ways for someone in your position to invest. Have a read through the Storm thread in this link to get an idea of what happens when excessive leverage goes wrong.


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## Sean K (18 April 2009)

Could take that loaned money to the casino too nomore4s! Or the track. Just keep putting in bits at a time to spread the risk. 

jason, I think you're starting a bit aggressivley. Could be an expensive lesson. 

The fact you're planning on keeping 15 grand for stop losses? and margin calls, is a bit troubling.


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## itsmejasong (18 April 2009)

Yeah It is a bit aggresive,I do see what u guys are saying what does you guys suggest I want to make the most of this recession.


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## So_Cynical (18 April 2009)

Just the thread title "CFD investing" LOL

Dude just a little conservatism please...with 15K u can make some reasonable 
money un-leveraged...and if u cant do that (the basics)...CFD's would wipe u 
out in no time.

Just pick 3 stocks right now, and lets see how u go real time over the next week.


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## nomore4s (18 April 2009)

itsmejasong said:


> Yeah It is a bit aggresive,I do see what u guys are saying what does you guys suggest I want to make the most of this recession.




Firstly don't rush - there will always be opportunities to make money. Not losing money should be your first goal. Don't be lured into thinking there is easy money to be made in the markets - it is not easy!

With the sort of leverage you are talking about you will only need one position to move against you and your $15k buffer will be gone. Leverage is two edged, it can work for you but it can also destroy you.

Read this thread for starters.

Then read this thread to see how nearly everyone loses money in the first year - even after making money to start with. Yes even me:


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## Sean K (18 April 2009)

nomore4s said:


> Firstly don't rush - there will always be opportunities to make money. Not losing money should be your first goal.



Agree. Don't rush! But, I think losing money can be a good lesson though. Just not too much!!! It's like horse riding. You're not a rider until you've fallen off 100 times. Not sure what that equates to in $$, but you probably need to experiences loses, through mistakes, or black swans, to see the complete picture. Falling off, surviving, learning, and getting back on, will make you a much better investor later. Just make sure you survive!!!


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## skc (18 April 2009)

itsmejasong said:


> Hi guys just wanted your opinion on a possible investing strategy I have.
> 
> Basically I have a bit of cash about 15 grand, going to take a personal loan of 35grand to make a total of 50 grand.
> 
> ...




With $15k + $20K personal loan, dump into CFD at 10% margin means you will control total shares of $350k. Annual CFD interest on $350K at say 6% is ~$21K. (More than your total outlay already!) Annual interest on personal loan on $35K at say 10% is another $3.5K.

With control of $350K worth of shares your $15K buffer (+ you initial 10% margin of $35K) can sustain a drop in value of ~$50K, or under 15%.

In summary:

If your basket of shares fall by more than 15%, you are wiped out and left to repay a $35K loan. You have also paid whatever interest you have paid so far. This can happen over the next two weeks, or this can happen at the final 2 weeks of your investment timeframe. 

If your basket of shares do nothing you have paid a ~$25K interest bill, offset by may be $15-20K in dividends depending on the stocks you bought.

If your basket of shares go up by 15%, you are up around $45K.

No one knows which one will play out, but any of the three situations *are all probable, not just possible*. That's why other posters call this a gamble rather than an investment.

So do reconsider your strategy and best of luck.


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## ThingyMajiggy (18 April 2009)

If you want to do it, do it. Everyone is against it, so why not have a go? Just be careful, if you lose it, you will have learn't your lesson, if not. Well Done.


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## Sean K (18 April 2009)

ThingyMajiggy said:


> If you want to do it, do it. Everyone is against it, so why not have a go? Just be careful, if you lose it, you will have learn't your lesson, if not. Well Done.



Great advice! Jump off that roof with the sheet as a parachute! Sail away! Whoohooo!


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## nomore4s (18 April 2009)

ThingyMajiggy said:


> Everyone is against it, so why not have a go?




lol, great advice. Everyone is against it so just do it, doing it because everyone else is against it is just plain stupid. If it all blows up in his face it could leave him in a deep hole that will take awhile to get out of.

With this strategy the op could lose his $15k and end up in $35k debt or worse, he may also make $50k but I know which one I think will happen especially in the current market. The interest charges from the CFDs alone will eat into the profit if it does come off. Risking $50k to make $50k is a poor risk reward imo.

There are better strategies around with less risk.


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## Cartman (18 April 2009)

skc said:


> With $15k + $20K personal loan, dump into CFD at 10% margin means you will control total shares of $350k. Annual CFD interest on $350K at say 6% is ~$21K. (More than your total outlay already!) Annual interest on personal loan on $35K at say 10% is another $3.5K.
> 
> With control of $350K worth of shares your $15K buffer (+ you initial 10% margin of $35K) can sustain a drop in value of ~$50K, or under 15%.
> 
> ...




Wise post !!

"Itsmejasong" (funny name  -----    

seriously, your 'concept' is fine --- but *not* with leveraged cash --- that may get you into hot water --- you also might get lucky !!


with 15 grand ------ id learn to trade Forex --- split your 15 grand into 1 grand lots ---- try and double one of them three times consecutively --- that will give you 8 grand  --------- so you get 8 chances to break even --- do it in 6 goes and you make 2 grand --- do it in 1 and you are a genius !!  

power of compounding (*not leverage*)is your best friend if you have limited capital  ----- of course it wont help if you dont learn to trade efficiently ---- thats what id concentrate on at this point


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## Sean K (18 April 2009)

Cartman said:


> with 15 grand ------ id learn to trade Forex --- split your 15 grand into 1 grand lots



What? From nothing to trading Forex?


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## ThingyMajiggy (18 April 2009)

nomore4s said:


> lol, great advice. Everyone is against it so just do it, doing it because everyone else is against it is just plain stupid. If it all blows up in his face it could leave him in a deep hole that will take awhile to get out of.
> 
> With this strategy the op could lose his $15k and end up in $35k debt or worse, he may also make $50k but I know which one I think will happen especially in the current market. The interest charges from the CFDs alone will eat into the profit if it does come off. Risking $50k to make $50k is a poor risk reward imo.
> 
> There are better strategies around with less risk.




Wowsers! Wrong time of the month or something? If he wants to do it, hes going to do it anyway. Since when is that advice anyway, its a question. I think its a crazy thing to do, but like it has already been said, losing money is a good lesson to learn, just not all of your money, so why not get lesson 1 out the way first? 

Ya never know, he might be some super genius and be able to do it, then all you lot would be bowing down kissing his e-toes.  

Just playin, no need to get your knickers in too many more knots.


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## itsmejasong (18 April 2009)

I am reconsidering...I have made some good returns using cfds, but in this current volatility this stategy would be foolish.

Would be nice to know how you guys are planning your portolios for the next 12 months?? 
if your using leverage what type and how much?
thanks for the info guys...Im far from a pro but hopefully over time ill get there


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## beamstas (18 April 2009)

Wow.. I think my eyes just popped out of my head 

Firstly.. CFD and INVESTING doesn't go in the same sentence

Also.. am i getting this right??
You are LEVEREGAGING YOUR OWN MONEY WITH A PERSONAL LOAN AND LEVERAGING THIS MONEY WITH CFDS

Thats DOUBLE leverage LOL 

Heres my advice. 

Stay out of the market.


You obviously have no idea about risk management, and i'd really hate to see someone not only loose all there own capital but possibly more. You do realise that you could lose the WHOLE 50K plus MORE (because of slippage and gapping over stops)

You could potentially go from having 15k of your own money to losing the 35k loan plus more putting you in debt $40,000+ dollars.



I'll leave you with some advice.. Profitable trading is both slow and boring

If you want to double your money overnight, go to the casino and put it all on red. At least that way you have a 50% chance of succeeding

Brad


*PS. I hope you don't end up like my signature*


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## So_Cynical (18 April 2009)

beamstas said:


> If you want to double your money overnight, go to the casino and put it all on red. At least that way you have a 50% chance of succeeding
> 
> Brad




Actually Brad its a little less than 50% - in euro roulette (one 0) there's a house edge 
of 2.70% and with American roulette (two 0's) the edge is 5.26%, of course im talking 
mathematical odds of red winning, not the payout.

http://en.wikipedia.org/wiki/Roulette


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## Cartman (18 April 2009)

kennas said:


> What? From nothing to trading Forex?




I dont see your problem with that suggestion Kennas ?? ---- 

My *first* statement was "learn to trade Forex" ----- thats why the world created Sims   ----- NB  i didnt say risk your money first  

after he "*learns*" to trade FX , the lad can trade risking a small % of his capital without all the crazy leverage he is considering --- 

do you see any better options --- other than not trading at all ?? 

ps if a trader cant learn to trade off a FX chart, then forget about trying any other kind of chart ---- its T/A at its purest imo

pps --- my last statement should be reinforced as well --- "concentrate on learning to trade" at this stage --------   you may have missed the point of my post Kennas ??


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## beamstas (18 April 2009)

So_Cynical said:


> Actually Brad its a little less than 50% - in euro roulette (one 0) there's a house edge
> of 2.70% and with American roulette (two 0's) the edge is 5.26%, of course im talking
> mathematical odds of red winning, not the payout.
> 
> http://en.wikipedia.org/wiki/Roulette




Bloody hell im never right

Well lets put it like this

100%-5.26% = 94.74% / 2 = 47.37% chance of winning

47.37% chance is still better than what he has right now 

Brad


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## Sean K (18 April 2009)

Cartman said:


> you may have missed the point of my post Kennas ??



Yes, probably. The guy was wanting to invest in blue chip fundamental stocks, so I'm sure it's fine for him to start intraday trading forex. Yes, missed your point. Sorry.


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## Cartman (19 April 2009)

kennas said:


> Yes, probably. The guy was wanting to invest in blue chip fundamental stocks, so I'm sure it's fine for him to start intraday trading forex. Yes, missed your point. Sorry.





ok -- im not gona get into another pointless brawl over semantics with clever people who appear not to read what people actually write -------  but correct me if im wrong ----

Itsmejasong was talking about *over leveraging himself to the hilt on CFD's* was he not?? --- Is that actually investing?  ----  not in my world its not!!

and since when do Forex traders only trade intraday??  ----  

id much rather see him blow a couple of $1000 accounts on FX and learn a lot about T/A, than put 50 grand of leveraged cash on shares in a CFD account --- 

What do you think he should do ??   (serious question)


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## CapnBirdseye (19 April 2009)

itsmejasong said:


> With this equity I'm thinking of leavering it up using cfds to buy blue chip companies (WPL, BHP) at a margin of 10%.




I agree with the other posters here.  Using highly leveraged CFD with limited exposure to losing in the past is asking for trouble.  Trust me I know.  Also trading CFD's can be quite stressful if you have a full time job.  Current market volatility is not your friend.

Personally,  actually my current trading strategy is looking at small/mid cap stocks that have taken a real hammering ands are now starting to recover.  By learning some TA and how to scan charts there are some very good gains to be made, and quickly without leveraging.  It's all about risk and money management.

Have a look at Kennas' morning posts.  He's pointing out a couple of miners every day who's SP has doubled in the last month!  You won't get that with blue chips.  But you risk has to be managed in order to make your overall strategy profitable.

Good luck, and please stay away from CFD's for at least a couple of years!  If you no get tempted and cant be pursuaded otherwise, start with your own cash, not the banks.  If you do well enough, there is no need to borrow more, if you don't, then its a lesson well learned.


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## Ardyne (19 April 2009)

itsmejasong said:


> Would be nice to know how you guys are planning your portolios for the next 12 months??
> if your using leverage what type and how much?




I buy bluechip shares that pay dividends as close as possible to an 18 month "at the money" put option. borrow the money for the shares and buy the option with my capital.

over the 18 months you receive most of the put money back so the main risk is interest. Beauty is you can participate on the down side

I bought 5000 ANZ this way at $20.50 in March last year. (Not so smart hey).
but I exercised my put. (paid back my loan money.) and re-bought them at $12.00. As of $17.20 I break even. AND my margin loan dropped from $100,000 to $65,000 so I'm looking to buy something else.

Also with an account where the options "speak to the margin loan" you NEVER get margin called as long as you have the puts.
Anyway its what I do.

Goodluck...and the CFD advice here is wise. Be vary wary


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## Nero64 (19 April 2009)

> Firstly.. CFD and INVESTING doesn't go in the same sentence




You can use CFDs to invest. Some providers allow you to buy CFDs using no margin, so there is no interest and you can change your stop price and set a limit as much as you want. Marketech used to offer this on small stocks. 



> I buy bluechip shares that pay dividends as close as possible to an 18 month "at the money" put option. borrow the money for the shares and buy the option with my capital.




Hey Ardyne, does the put option only get triggered when the share goes below the put price. What happens if it gets triggered and the stock jumps 100% if the company gets taken over. Do you have a stop with the put option. Do you only lose your initial layout?


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## Ardyne (19 April 2009)

Hey Nero
I BUY the put option so therefore I have the OPTION to sell my shares at the strike price for the next 18 months. It only gets triggered when it expires or I choose to execute it. If share price drops below the strike price I wait until I beleive the price has bottomed or if the reduction in my margin loan (selling at the strike price and then re buying shares at the new low)justifies the expense of buying the new option at the new buy price.


I see it as . I buy a $100,000 car...I buy insurance
                 I buy a house. I buy insurance
                 I margin loan $100,000....I buy insurance (put option)

Imagine buying a car with insurance that gives you a rebate (dividends) and if after a year it drops buy 30% you can sell it for what you bought it for ?


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## mullys (24 April 2009)

Hey Jason,
So far it looks like not alot of people want to give you any suggestions.  You will loose all your money if you do what your going to do.  
I would suggest before you loose it you should go spend $30 and buy Adaptive Annalysis by Nick Radge.  He talks about CFDs in the first few chapters and how to use stops to minimise your loss.  At least you will learn something if you try some of these methods as you go.  Good luck.


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## Kez180 (24 April 2009)

kennas said:


> Great advice! Jump off that roof with the sheet as a parachute! Sail away! Whoohooo!





But could you imagine if that WORKED!


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## cutz (24 April 2009)

Ardyne said:


> Hey Nero
> I BUY the put option so therefore I have the OPTION to sell my shares at the strike price for the next 18 months. It only gets triggered when it expires or I choose to execute it. If share price drops below the strike price I wait until I beleive the price has bottomed or if the reduction in my margin loan (selling at the strike price and then re buying shares at the new low)justifies the expense of buying the new option at the new buy price.
> 
> 
> ...




G'Day Ardyne,

Sounds like an interesting strategy,  what did it cost to buy 5 puts 18months out?


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## Sicilian Trader (24 April 2009)

itsmejasong said:


> With this equity I'm thinking of leavering it up using cfds to buy blue chip companies (WPL, BHP) at a margin of 10%.




itsmejasong,

(I just tried to PM you but dont have it activated)

ItsmeST. Jesus, you sound exactly like I did about 6 months ago. 

Great advice on this thread btw.

Coming from someone who did exactly the same thing, MY ADVICE IS:

---- Wait on the sidelines and dont invest in CFD's (yet) ----

i was in the same position you were. this was my thinking and what played out:

- had some significant cfd's profits during november 2008, 
- 25K equity, total p/folio 700K, made 10% (less interest) in 2 weeks (about 60K)
- thought i was gordon gekko (started wearing braces to work and bankers shirts)
- told all my friends about it because at this point i was a new market wizard, an overnight genius
- liquidated my entire portfolio with a 200%+ gain in just over 2 weeks
- started having feelings of grandeur
- was in the market for a house to live in at the time (with a 5 - 7 years time horizon) 
- but thought to myself _properties aint going up 25%-40% over the next year, why not buy the equivalent of a house in the market through *'cfd investing'*?) _
- Effectively I was going from a Gekko mentality to thinking I could be Warren Buffet by next summer
- so i threw in all of my equity + gains in cfds, leveraged to the f-ing eyeballs, close to $1m with cmc, some 1% margin requirements on some "high yielding blue chips"

                             guess what happened?

- had a 3-4% drop over a couple of days and handed 40K back to Trembling Hand and others like him in the market 
- Most of my newly 'hard earned' cash was gone 
- Liquidated everything, still took out 20K , so still had 80% return
- That was all in the month of November, havnt really touched a CFD since (not with anywhere near the same stupidity and ignorance)

I was VERY VERY lucky to get out the way I did.

the one realisation I had was that I was investing (gambling) on *hope* and NOT *expectation*. I had no edge and was a fool to think i could sit and wait for my $1m portfolio to double by 2011. I realised that making profits can be a lot more dangerous than making losses because of this feeling of invincibility (scary to think how quickly one can extrapolate their fictitous wealth). I also realised that I would be paying tax on my 20K, but if that was a gain made from gambling (which is what I was effectively doing) then no tax would be paid on it.

So i took a breather and I buried myself in books and in this forum, courses, simulator, back testing, only to realize that i knew NOTHING (nothing!) and how lucky i am to have avoided paying back money that I could have lost due to slippage (jesus, i get chills thinking about it)

Take you time, there are always opps for trading / investing , you just need to be ready and know where to look, markets wont go anywhere

Advice, 
- become active on this forum, read as much as you can , there are some jewels of knowledge on here (free!)
- Agree with a previous post, buy nick radges book on adaptive analysis (the first 50 pages will be for you, read it 3 times)

Other books that have helped me given you are where i was 6 months ago (but may be a little early to read right now, maybe just for consideration) :

- Trading in the zone (mark douglas)
- Fooled by randomness (nassim taleb) or Black Swan (same author)

Good luck mate and be patient 

ItsmeST


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## itsmejasong (24 April 2009)

thanks guys for all your input!! will study cfd trading ALOT more before I have a go. 
Just wanted to say theres a good group of ppl here on ASF


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## Ardyne (24 April 2009)

Cutz, how are ya

Each option was about 3.2k each and covered three dividends which were

0.64 +0.72 +0.64 = 2k after franking . (maybe 2.7k before, not sure exactly)

I rolled down anz from $20.50 to $12.00 before the third dividend but the reduction in my margin loan was worth it. i plot it on a spread sheet to keep track of it all. 

I recently rolled back up to $16.00 puts locking in the $4.00 move from up $12.00 and will roll up or down depending on the movement of the market. If anyone is interested in this strategy at all I'm happy to post my progress in a new thread since it doesnt really belong here. Biggest risk to this strategy is if the stock doesnt move up or down over the 18 months. Its a lower reward/lower risk type strategy. In my opinion anyway


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## cutz (25 April 2009)

G'Day Ardyne,

I don’t mean to sound critical, just stimulating discussion regarding stock hedging strategies but I think buying puts with 18months to go seems to be a rather expensive way of doing things, I can see your point of you insure house/car so why wouldn’t you insure portfolio but the premium on house insurance is a minuscule amount compared to the value of a home.

IMO on a stock like ANZ (has low volatility) if I wanted to hedge I’d go for a split strike synthetic short, i.e buy just OTM puts and sell some OTM calls to fund the put purchase, one month at a time.

Mind you this may be awkward to manage on a stock like Macquarie with has high volatility as it will cap your upside, I know all about this as I purchased some MQG stock recently but the management of the above strategy has become tedious, especially with the recent surge.

But if your method is profitable who am I to say.

BTW your suggestion of starting a thread RE hedging methods sounds like a good idea.


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## Ardyne (25 April 2009)

critisism will only improve what I do. Theyre probably are better ways to do it and the strategy is evolving over time but I comfortable with the risk profile this has. with what you suggest thats a possibility as i'm investigating moving from 18 month options to shorter term ones with greater deltas so I can roll up and down at smaller % moves in the stock price. I plan to sell calls when I get within reach of a certain profit target for each position.

I'm not looking for every last cent I can squeeze out of every roll up or down. I'm trying to get a delta of about 0.7(or is it 0.3?) on the rolls up and down. So if the stock moves $1.00 up i want to pay and additional $0.3 to secure the $1.00 move (giving me $0.7 locked in with the put). If it rolls down $1.00 I want to pay $.3 (or $300 for the option)to reduce my margin loan by $1000.00. If its at 0.65 and the charts look good I'll roll early to secure my profits...make sense ?

re home insurance. Remember I get a fair bit back in dividend which reduces the amount I've paid by expiry. I get your point though.


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