# Where does the money you make from CFDs come from?



## Unbreakable (6 July 2010)

Hey peoples,
I honestly have no idea, in fact i don't have any type of qualifications, probable the reason why i've traded CFD's for the last 6 months and lost 4K on the interest of holding....

I'll make a apology to anybody reading this thread, as i've have effectively wasted your time, but how would you feel if your sold your longs today only to find out your still down a few hundred dollars?


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## Jim McSlim (10 July 2010)

It is a simplification, but basically CFDs like all derivatives are a 'zero-sum game'. Profits made from the winners are funded by the losses of the losers.

If you are paying interest to fund a long CFD position overnight, this is funding the interest someone is RECEIVING when they hold a short CFD position. The difference in interest rates is the spread that is pocketed by the CFD provider as their income stream.

Of course, if you are trading CFDs via a market-maker model then the MM is considering each trade you are making and either deciding to hedge it in the market (if your view on the underlying agrees with theirs) or they take an opposite position against you (if their view on the underlying is different).


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## nioka (10 July 2010)

Unbreakable said:


> Hey peoples,
> I honestly have no idea, in fact i don't have any type of qualifications, probable the reason why i've traded CFD's for the last 6 months and lost 4K on the interest of holding....
> 
> I'll make a apology to anybody reading this thread, as i've have effectively wasted your time, but how would you feel if your sold your longs today only to find out your still down a few hundred dollars?




Trading CFDs should be done at a casino and not on the stock market. It is pure and simple gambling with the house taking a small cut on every trade. For anyone to make money someone else must lose.


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## pixel (10 July 2010)

nioka said:


> Trading CFDs should be done at a casino and not on the stock market. It is pure and simple gambling with the house taking a small cut on every trade. For anyone to make money someone else must lose.




How many CFD trades have you been "gambling"?
There's a smart way, where the trader takes a calculated risk and buys or shorts a position - just like investing on margin. That's best done on the basis of technical analysis, i.e. calculating the odds of a share going up or down. It works best with a trading system that you have tested and back-tested to know it gives you more winners than losers. It also requires the discipline to stop out at the correct break point.

And there's a stubborn "I'm right and the market is wrong" way, which indeed is gambling multiplied by the margin leaverage factor. We know all about those, right? 

Depending on which camp you're in, you'll taste success very quickly; conversely, you'll be broke much quicker than if you were employing the old Buy-Hold-Pray method, where you ride out the next little dip because it's only a matter of time that your pick will come good.

PS: When you trade the Physical, your broker will also take a small cut from every trade: Brokerage on normal buy and sell contracts, and even more if you're going short - if the broker lets you short at all.


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## nunthewiser (10 July 2010)

nioka said:


> Trading CFDs should be done at a casino and not on the stock market. It is pure and simple gambling with the house taking a small cut on every trade. For anyone to make money someone else must lose.





LOL it may be your experience and thats how the cookie crumbles...does not mean everyone else shares your experience.

Um is that not what normal asx brokers do ? take a cut ? 
um on the ASX stocks everbodys a winner ? no one profiting of anothers stupidity/circumstances?

i must have the wrong market.


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## jonojpsg (10 July 2010)

Surely that is the same situation in the real market - if I buy low and sell high then someone else has bought high and unless they sell very high will sell lower.  Obviously if a company makes profits, discovers more resources, develops new technologies, etc. then the value of the company increases and so my capital increases without someone else having to lose, but really, how many companies simply keep on growing??  

I guess it depends a bit on the timeframe you're looking at, but for most active share traders, the time frames we trade over range between hours, days to maybe years but still looking to profit from other buyers willing to pay higher prices.  I know as I have bought at the highs a number of times on spec and blue chips stocks then watched as they retreated - and a number of times had to sell lower than I bought.  It's the nature of the process is it not?


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## brty (11 July 2010)

> For anyone to make money someone else must lose.




This is true for all markets. Money out can only equal money in. Part of the money out is brokerage, therefore there must be more losers in total than winners.

A source of 'money out' of the stockmarket as a whole is dividends from the companies themselves, but in reality it is minor compared to all the new money coming into the market, and money leaving the market (via IPOs, sales etc).

brty


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## nioka (11 July 2010)

brty said:


> This is true for all markets. Money out can only equal money in. Part of the money out is brokerage, therefore there must be more losers in total than winners.
> 
> A source of 'money out' of the stockmarket as a whole is dividends from the companies themselves, but in reality it is minor compared to all the new money coming into the market, and money leaving the market (via IPOs, sales etc).
> 
> brty




I don't agree. Definitely not related to ALL markets. A true investment is made initially to provide a company with funds that will be used to generate increased value through the production of goods and services. Sometimes that increased value can be distributed as income while in other cases used by the company to build further value in that company. That is the only reason for the stock market to exist. However the system is corrupted by dealers and gamblers who use these companies as the "coin" in a gamble. That is a pure and simple fact and anyone that comes up with an excuse for using the stock market for any other reason is deluding themselves.

In saying that I qualify the statement with the view that there are genuine reasons for the trading of stocks. The main one being that it is reasonable for an investor to be able to withdraw his/her capital. It is also reasonable to transfer the risk associated with one investment to another that has a different degree of risk.

The present system is corrupted in many ways. My theory is "if you cant beat em join em". The fact that I do trade does not alter my view in any way.


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## mazzatelli (11 July 2010)

nioka said:


> I don't agree. Definitely not related to ALL markets. A true investment is made initially to provide a company with funds that will be used to generate increased value through the production of goods and services. Sometimes that increased value can be distributed as income while in other cases used by the company to build further value in that company. That is the only reason for the stock market to exist. However the system is corrupted by dealers and gamblers who use these companies as the "coin" in a gamble. That is a pure and simple fact and anyone that comes up with an excuse for using the stock market for any other reason is deluding themselves.
> 
> In saying that I qualify the statement with the view that there are genuine reasons for the trading of stocks. The main one being that it is reasonable for an investor to be able to withdraw his/her capital. It is also reasonable to transfer the risk associated with one investment to another that has a different degree of risk.
> 
> The present system is corrupted in many ways. My theory is "if you cant beat em join em". The fact that I do trade does not alter my view in any way.




Your first point - i.e. allowing capital raising via equity rather than debt is the reason why a primary market exists - i.e. IPO's/issues etc. The money is used by the company to build value/setup the business.

Your second paragraph concerns liquidity and being able to exit the initial investment - this is the secondary market in which we trade in. Without the dealers and gamblers [I prefer speculators] in this market - there will be no liquidity in the SECONDARY market. 

Are you arguing for ONLY a primary market?


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## brty (11 July 2010)

nioka,

Whenever you sell a share to take money out of the market, it can only equal new money into the market, that is my premise. Can you please provide one shred of evidence, or case where this is not so.

If you are going to refer to others selling shares to buy your shares, then the people who bought the others shares provided the new money.



> used to generate increased value through the production of goods and services




This is the crux of the misunderstanding many have about the stockmarket. The 'value' of a company is only what people are prepared to pay to buy the shares. A good 'value' company can have shares at $10 each, but if there are more people wishing to sell the shares than buy the value, then the price will fall. The money out can only equal the money in.

If you think there is another source of money created within the market, other than dividends, I am eager to hear of it.

brty


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## pixel (11 July 2010)

nioka said:


> The present system is corrupted in many ways. My theory is "if you cant beat em join em". The fact that I do trade does not alter my view in any way.




I'm with brty on this one: Trading, i.e. the secondary market, provides the liquidity as well as assures the long-term holders/ investors that their investment is still "worth something".

This thread being about CFDs, I'd also like to raise the "spectre", as some may think about it, of a Tertiary Market. Originally, derivatives like options, warrants, and finally CFDs were created to insure the value of a portfolio against financial loss beyond a certain risk level that the investor was happy to accept. Say, you held ANZ at $24 and wanted to cover the risk of them falling below $22, you'd buy a Put option at that price; the insuring counter-party would calculate the risk, charge an insurance "premium" accordingly, and everybody was happy.
... until the insurers found out they had the financial clout to hold ANZ just long enough above $22 to avoid having to pay out the insured risk, yet keep the premium...

Think of CFDs along the same lines - which is, incidentally, how many traders use them - and most of the antipathy evaporates into thin air. It may leave those behind, who still cling to concepts of morals and ethics while nonetheless participating in the Markets with the aim of making a living for themselves. Nothing wrong with having that aim IMHO. But doing it while proclaiming the injustice and corruption of it all, is at best an indication of a split personality, and at worst meets the definition of hypocrisy.


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## nioka (12 July 2010)

mazzatelli said:


> Are you arguing for ONLY a primary market?




Definitely NOT. What I am saying is that the present system is CORRUPTED and manipulated by GAMBLERS who have devised variations of using the INVESTMENT market to a point where INVESTING is incidental and SPECULATING is the main aim of the game.


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## Paul Ellis (9 August 2010)

nioka said:


> Definitely NOT. What I am saying is that the present system is CORRUPTED and manipulated by GAMBLERS who have devised variations of using the INVESTMENT market to a point where INVESTING is incidental and SPECULATING is the main aim of the game.




Nioka, I think you need pull your money out of exchange traded public companies and invest in unlisted public or private companies where you can concentrate on the generation of value and not be angst ridden about movements in the price of stocks.

You sound like my Dad who is a 'buy and hold' type and complains about 'shorters' attacking his stocks.  It is pointless complaining about it because thats the way it is and it couldnt operate any other way.  On any given day, two parties will have differing views on the value of a stock - irrespective of their time frame, they both have the right to buy or sell.


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## weatherbill (11 August 2010)

ASX option are less costly in fees and a little more potential bang for the buck IMO.

theres more peace of mind with options as well, in that you dont have to have a maintenance margin if just buying. Just gotta watch not holding too long into the exp date if you're down. Buying Puts are the way to go with a rare call in action.


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## Tysonboss1 (11 August 2010)

pixel said:


> he trader takes a calculated risk and buys or shorts a position - just like investing on margin




"Trading" is never like "investing".


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## Tysonboss1 (11 August 2010)

brty said:


> This is true for all markets. Money out can only equal money in. Part of the money out is brokerage, therefore there must be more losers in total than winners.




Thats true for short term trading, especially in options and cfds etc.

But over time when you include the profit being generated by the actual companies that those asx codes represent then it is not a "zero sum game".


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## brty (11 August 2010)

Tyson,



> But over time when you include the profit being generated by the actual companies that those asx codes represent then it is not a "zero sum game".




As a stock owner you can only extract money from dividends or selling your shares. The profit of the company does not add to your bottom line unless it increases either the dividend or share price. The current dividend yield for the All Ords as a whole is 4.6%. This is less than current bank interest. 

The zero sum game comes into the equation in terms of the market, buying and selling of the shares. This is where it is not possible for more to come out of the market than goes in. As I indicated earlier....



> If you think there is another source of money created within the market, other than dividends, I am eager to hear of it.




brty


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## skyQuake (12 August 2010)

brty said:


> Tyson,
> 
> 
> 
> ...




Just pure equities is not 0 sum, if prices rise its positive sum if it falls its neg sum.
Though I think you are correct in terms of not possible for more to come out than going in. Just valuation of the holdings can increase/decrease.


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## brty (12 August 2010)

SQ,

Valuation of the market or an individual stock changes all the time, however that is separate from money in money out.

The classic example today is TLS. Yesterday with the ~12.5b shares on issue it was 'valued' at ~$40.6b when the share price was 3.25. 

Today with only 232m shares changing hands the 'value' of TLS is now ~$37.1b.

~$3.5b has been wiped of the 'value' yet only ~$696m of trades have occurred. That $696M in trading is the money that has gone in and out of the stock.

Long term players in stocks assume that there will be more money available to go into a stock in the future as some of the metrics of a stock change, ie 'value' is recognized etc.


brty


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## skyQuake (12 August 2010)

brty said:


> SQ,
> 
> Valuation of the market or an individual stock changes all the time, however that is separate from money in money out.
> 
> ...




Agree with that, just not the 0 sum bit. Eg if TLS goes to 0 tomorrow. Net in < net out.


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## brty (12 August 2010)

> if TLS goes to 0 tomorrow. Net in < net out.



 ??

Even if it did go to 0 tomorrow, the money in can only equal the money out. The sum purchase price of all the shares ever bought can only equal the sum total of all the shares ever sold. 

For existing punters today, the money out of the whole market in the future can only equal what goes into it, therefore for today's holders of stocks, they rely on new money coming into the market to continue to rise so that they can take more out in the future.

Because of the leeches in the system. err sorry, brokers, then when Joe buys a share for $10 he actually pays $10.01 and when Fred sells his share for $10 he only gets $9.99, therefore it is a negative sum game (with the exception of dividends).
It would be interesting to see if the total of all dividends paid were more or less than the total of all brokerage and fees paid. I assume that when you add tax paid by the winners in the game, it would definitely be a losing game in the long run for all participants as a whole.

brty


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## skyQuake (12 August 2010)

brty said:


> ??
> 
> Even if it did go to 0 tomorrow, the money in can only equal the money out. The sum purchase price of all the shares ever bought can only equal the sum total of all the shares ever sold.
> 
> ...




Gotcha, I was using neg/positive sum in terms of Asset valuation rather than flows. ie for every winner there does not have to be a loser.



> I assume that when you add tax paid by the winners in the game, it would definitely be a losing game in the long run for all participants as a whole.



taking an extreme example, If a stock lists at 1c and runs to $1 in a straight line, that would make everyone winners


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## Tysonboss1 (12 August 2010)

brty said:


> Tyson,
> 
> the All Ords as a whole is 4.6%. This is less than current bank interest.
> 
> ...




Cash is not inflation hedged, where as the underlying assets of the companies are.

So bank interest of 4.6% is actually 1.6% after inflation has taken it's toll on the underlying asset being the cash itself that makes up the deposit.

Plus most companies don't pay out 100% of earnings, they retain some to make further investments in growth.


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## brty (12 August 2010)

SQ,



> taking an extreme example, If a stock lists at 1c and runs to $1 in a straight line, that would make everyone winners




How do the owners of the stock extract their money in this case?? They sell to someone. New money. It does not change the fact that the money out can only equal the money in. Those particular shareholders have done well.

Tyson



> Cash is not inflation hedged, where as the underlying assets of the companies are.
> 
> So bank interest of 4.6% is actually 1.6% after inflation has taken it's toll on the underlying asset being the cash itself that makes up the deposit.
> 
> Plus most companies don't pay out 100% of earnings, they retain some to make further investments in growth.




I don't deny any of this, yet it does not change the fact that you as a holder of stock can only extract your money by selling the shares, apart from dividends. How else do you extract money?? The same arguments you hold for interest apply to dividends. 

brty


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## Tysonboss1 (12 August 2010)

brty said:


> Tyson
> 
> 
> 
> ...




You extract money through dividends and if you have held long enough for the company to grow then you should also make a profit when you sell to some one else.

The inflation example I gave does not hold true for dividends over time, Because as the currency is devalued over time the dividends and/or the value of the underlying assets will rise.

for example, after 25 years inflation would have halved the buying power of $1000 cash, So if you had kept $1000 in a cash invesment both your $1000 investment and your $46 interest have lost buying power.

However if you owned an asset worth $1000 and inflation halved the buying power of cash over 25 years, when you come to sell that asset you should be able to sell it for $2000 and over that time prices for the products the assets produces would have gone up so the asset would be generating a return of $86pa vs the interst on the cash of $46


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## brty (12 August 2010)

Tyson,



> for example, after 25 years inflation




Ahh, the long term. Yes, if you can find a company that has stable growing dividends over the long term you will do well. If you go back 25 years and tried to invest in that type of company you would have to buy quite a few companies to guarantee that some survived the test of time. The history of the stockmarket is one of historic performances of the survivors. Once you count the cost of long term failures, the performance is not that great as many would have you believe.

Of course you have still assumed that there is more new money in the future to pay you for your shares, you still need that new money to pay for your exit. The Japanese have waited for 20 years for there market to pick up, but it is not happening. 

Because we have a superannuation guarantee in this country, then provided employment continues to rise and inflation keeps happening, then you can be assured there will be a market in 25 years time for you to cash out in, provided of course you get the choices of companies correct.

brty


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