# Index CFDs



## ocd (19 October 2005)

After much research I have come to the conclution that trading in index CFDs can reap better rewards that trading options. 

I don't have time to go in the details now but this may help newbies and even pros who don't want the complexities of trading options.


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## money tree (19 October 2005)

Ive been teaching about index CFDs for years...

they are better than managed funds:

- no M.E.R
- paid divs
- can tap into equity
- up to 99% gearing
- no entry/exit costs
- low starting capital required
- no minimum monthly contributions


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## Milk Man (20 October 2005)

money tree said:
			
		

> Ive been teaching about index CFDs for years...
> 
> they are better than managed funds:




Anything is better than managed funds. Majority cant even beat the index. Will look into index CFD's though.


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## RichKid (20 October 2005)

Milk Man said:
			
		

> Anything is better than managed funds. Majority cant even beat the index. Will look into index CFD's though.




But be careful about the general problems with CFD providers- pricing, liquidity, spread, risk of losing your capital if they go under etc

Also, lack of franking credits via CFD's.


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## doctorj (20 October 2005)

For those unaware, clients of Refco affected by their bankruptcy have had their funds in their trading accounts frozen.  I'm told that money in trading accounts is typically aggregated in a trust.  If this is a concern to you when trading CFD's, look to a company that keeps money in seperate accounts and in your name.  As far as I'm aware, Macquarie Bank is the only Australian CFD issuer that offers this service.


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## mit (20 October 2005)

Agree with the positives but (with experience of CMC) the negatives are:
. Wide spread. With Sector CFDs the spread is arbitarily changed.
. The CFD index does not closely follow the market. For short term trades you can be correct with the actual index but still lose with the CFD. (If you study the relationship however you can make some money)
. With Longer Term trades the interest paid becomes an issue and should be remembered. This is especially true with sectors that have low volatility compared to their index value. Current interest charged is 7.5% so the market needs to move that much just to break even. That is 330 pips for the XJO equivalent in a year.

Other CFD providers may be different

MIT


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## Milk Man (20 October 2005)

mit said:
			
		

> Agree with the positives but (with experience of CMC) the negatives are:
> . Wide spread. With Sector CFDs the spread is arbitarily changed.
> . The CFD index does not closely follow the market. For short term trades you can be correct with the actual index but still lose with the CFD. (If you study the relationship however you can make some money)
> . With Longer Term trades the interest paid becomes an issue and should be remembered. This is especially true with sectors that have low volatility compared to their index value. Current interest charged is 7.5% so the market needs to move that much just to break even. That is 330 pips for the XJO equivalent in a year.
> ...




If thats the case then the big US/European guys should be the pick. Are CMC Aussie? Sounds like the same shinanigans the Aussie option MMs pull from listening to what WayneL has said.


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## mit (20 October 2005)

CMC was started in Britain and is one of the bigger CFD companies

MIT


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## Smurf1976 (20 October 2005)

Beware of IG Markets unless you like the idea of sudden 150 point plunges in the index which take out your stops (if you're long) and then reverse to be back up where it started just minutes later. 

I do think that there could be a way to make profits from these sudden movements though but the lack of decent historical pricing data makes it difficult to work out how to do it.


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## money tree (20 October 2005)

mit you make it sound like 7.5% is a lot

most people with margin loans pay more than that!


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## randomtrader (26 October 2005)

I've been trading options for two weeks now and have over $5000 profit.  It took me two years to learn but it is very worth it.  Don't know anything about CFD's. What are the major differences?


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## wayneL (26 October 2005)

randomtrader said:
			
		

> I've been trading options for two weeks now and have over $5000 profit.  It took me two years to learn but it is very worth it.  Don't know anything about CFD's. What are the major differences?




It's refreshing to hear you've spent a substantial amount of time learning, and it sounds like you're off to a good start.

Hope it goes well for you.


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## mit (10 November 2005)

money tree said:
			
		

> mit you make it sound like 7.5% is a lot
> 
> most people with margin loans pay more than that!




With a margin loan you only pay what you owe. So if you are 50% margined you pay your 8+% on the borrowed 50% so it is 4% on your total position. 

With CMC CFDs you pay 7.5% on the lot and if you shares grow by 10% you pay 7.5% on this as well. How would you feel if the interest you paid on your mortgage increases as the value of your house increased no matter the equity you had!

So for normal equities I think that unless you absolutely need the high leverage margin shares win hands down.

MIT


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## mit (10 November 2005)

I've pretty much had enough of CMC, the service is as bad as just before they started charging commissions but I like playing with the indexes at a $1 per pip and Macquarie don't seem to have them. Do any other CFD providers have similar indexes?

I'm trialing Markettech at the moment.

MIT


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## money tree (10 November 2005)

mit said:
			
		

> With a margin loan you only pay what you owe. So if you are 50% margined you pay your 8+% on the borrowed 50% so it is 4% on your total position.
> 
> With CMC CFDs you pay 7.5% on the lot and if you shares grow by 10% you pay 7.5% on this as well. How would you feel if the interest you paid on your mortgage increases as the value of your house increased no matter the equity you had!
> 
> ...




Umm.......incredibly flawed logic there.

Nobody says you have to use maximum leveraged with CMC. And you DONT pay interest on the lot. You could use CMC to gear @ 50% and pay 3.75%. 

If your shares went up 10% and you were leveraged 20:1 do you really think the increased interest would be a concern? lol What if the shares went down.....so does your interest. rather have it that way if you ask me.

margin loans are crap


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## Kauri (10 November 2005)

Yes, I think from memory my CFD interest works out to .022*% per day on total amount of holding. It certainly doesn't enter the equation in my short term trades.


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## mit (10 November 2005)

money tree said:
			
		

> Umm.......incredibly flawed logic there.
> 
> Nobody says you have to use maximum leveraged with CMC. And you DONT pay interest on the lot. You could use CMC to gear @ 50% and pay 3.75%.
> 
> ...




Do you traded CMC CFDs, or used a Margin Loan or just teach? Have you examined the statement? Read the PDS (Page 3). Interest is paid on the entire amount. After deducting all of the Margins and IF you have OVER $15k in your account CMC will pay you 3.5% on that residual amount.

Say $50k to control a $100k position. 

Margin Loan you pay 8%+ on the $50k. 
CMC CFDs you pay 7.5% on the $100k. If the margin is 5% you get paid 3.5% of the $45k

Position goes to $110k

margin Loan you pay 8% on $50k.
CMC CFDs you pay 7.5% on the $110k. Paid 3.5% for the $65k.


The difference to me is at least $10k a year in interest charges. I would only use CFDs for shares if high leverage was required and the ROR was low enough.

MIT


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## mit (10 November 2005)

Kauri said:
			
		

> Yes, I think from memory my CFD interest works out to .022*% per day on total amount of holding. It certainly doesn't enter the equation in my short term trades.




Horses for courses, I still use CFDs for somethings but only if it wont work under a margin loan, It still adds up. Say a trader had $10k in their CFD account and at the end of 12 months they added another $20k to make $30k.  No body would doubt that this is a reasonably good outcome. If, however, they held on average an overnight position of $100k then the total interest cost is $7.5k which is a significant portion of their profit. If the effective interest rate could be dropped 1% that would be a 5% increase in profits or a 10% increase in profits if they had "only" doubled their money. 

MIT


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## Whathell (8 December 2005)

how can you simply compare the interest charged on a 50k loan at 8% with a 100k loan at 7.5%???


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## mit (8 December 2005)

Hi WhatHell

A Margin Loan is like buying a house. You put down a deposit and borrow the rest. If you want a $100k position and plop down a $50k deposit then you are paying interest on the $50k.

With CFDs if you have $50k in your account and start a $100k position  you pay the interest on the entire $100k. So even if the interestrate  is lower on the CFDs you can end up paying more in interest.

This however is just one consideration whether to use CFDs or a margin loan of course. 

MIT


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## Milk Man (8 December 2005)

> With CFDs if you have $50k in your account and start a $100k position you pay the interest on the entire $100k. So even if the interestrate is lower on the CFDs you can end up paying more in interest.



 Is this true? Doesnt sound very appealing if so.


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## mit (8 December 2005)

If after 12 months you make 20% and have $120k, with a Margin Loan you pay interest on the original $50k still but with a CFD the interest is payable on the entire $120k.

Some CFD providers will pay interest (CMC 3.5%) on the cash in your account that is in excess of margin.

HOWEVER

CFDs are good where you have such tight stops that leverage greater than 65% makes sense. 

Another reason is where you have little cash. A round trip for a $9k position in a Comsec margin loan is $59. With CMC it is $20 but you have to watch the hidden brokerage in the spread. With Macquarie it is $36 but you get DMA so no spread issues.


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## markrmau (8 December 2005)

I think this interest rate thing is a bit of a furphy. I would like to point out 2 things.

1. Even if you are using margin lending over an index fund, you are EFFECTIVELY paying interest on the entire portfolio valuation at any point in time. Why? Consider two scenarios: 

a) you borrow $50k at 7% p.a. and contribute $50k for a $100k portfolio. At any point in time, you could sell your 50% of the portfolio and stick it in the bank and recieve the ONCR (well in theory). So EFFECTIVELY, you are paying the ONCR on YOUR contributed funds anyway.

b) You contribute $10k, and use marketech to buy the index, paying (ONCR+1%)*100k. 

Probably not a hell of a lot of difference.

2. The real reason that an investor (as opposed to a trader) would use margin lending is simply because the capital gains tax is halved after holding for >12 months. CFD's will not have the CGT halved, regardless of time held.

[This post is not intended to be used as financial advice, and may contain errors]


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## mit (9 December 2005)

ONCR?


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## mit (9 December 2005)

mit said:
			
		

> ONCR?




Overnight Cash Rate (answering own question)

MIT


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## robots (31 December 2005)

hello,

forget CFD's, may as well "bet" straight out on indices, stocks and commodities with IG Index.

i think all AXS200 stocks available, sure there is a spread but as you know you pay for everything.

CFD's seem to be a complex betting system

thanks
robots


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## mlennox (3 January 2006)

RichKid said:
			
		

> But be careful about the general problems with CFD providers- pricing, liquidity, spread, risk of losing your capital if they go under etc
> 
> Also, lack of franking credits via CFD's.




pricing? liquidity? spread? 

don't have a clue what your going on about with pricing. 

into and out of a position with CMC will cost you $10 if your trading anything outside the top200 its best to not go with CFDs due to the interest payments you will need to front up with if the stocks are of low liquidity, spreads are normally 1c away from the price in australia in america it can go as far as a dollar away from the actual price but improves once the bell chimes, CMC won't go under they've been around for 5 years.


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## mlennox (3 January 2006)

Milk Man said:
			
		

> Is this true? Doesnt sound very appealing if so.




your forgetting that if the price goes the way you planned you make that on 100k not 50k this is the whole benefit of CFDs


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## mlennox (3 January 2006)

randomtrader said:
			
		

> I've been trading options for two weeks now and have over $5000 profit.  It took me two years to learn but it is very worth it.  Don't know anything about CFD's. What are the major differences?




similar to options in that a small price move can mean a bigger profit. Though as most are saying the providers of CFDs are not very willing to part with there dosh.


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## mlennox (3 January 2006)

mit said:
			
		

> Hi WhatHell
> 
> A Margin Loan is like buying a house. You put down a deposit and borrow the rest. If you want a $100k position and plop down a $50k deposit then you are paying interest on the $50k.
> 
> ...




obviously you'd use a margin loan on anything out of the top 50 aussie stocks, as the liquidity vs interest is  :goodnight


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## Smurf1976 (3 January 2006)

mlennox said:
			
		

> CMC won't go under they've been around for 5 years.



I'm not commenting on CMC themselves, I know nothing about them as a company, how financially sound they are etc. but IMO the argument that something won't go under just because it's been around for 5 years is not a valid one. Plenty of businesses have been around a lot longer than that and eventually gone under - Pasminco was around as a company for over a decade, Ansett a lot longer than that. Both went broke. Plenty of others could be added to that list both in Australia and worldwide.

As I said, this isn't intended as a comment about CMC.


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## mlennox (3 January 2006)

yeah no i don't mean just due to how long they've been around that they won't go under i'm saying as long as theres a market they can make money out of why would they?


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## troll (11 June 2006)

try trading STW, this is an exchange trade fund over the S&P ASX 200. The spread is tight becuase its exchange traded.


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## RichKid (11 June 2006)

troll said:
			
		

> try trading STW, this is an exchange trade fund over the S&P ASX 200. The spread is tight becuase its exchange traded.




...but watch out for the ex-div drop as unlike the xjo this one pays divs with franking- see the STW thread. Spread can be wide from my limited observations.


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