How do CFDs really work?

[Trembling Hand]

No the CFD broker will do all the conversions. The only thing you will have to convert is the P or L after the trade is finished. That stays in the currency of the trade until converted by you back to the base AUD.

 

[winsonlee]

No the CFD broker will do all the conversions. The only thing you will have to convert is the P or L after the trade is finished. That stays in the currency of the trade until converted by you back to the base AUD.

When you mention when the trade is finish is when i sells the share ?

I still dont quite get it. If the 5% margin is US 5,000, i have to convert AU to US 5,000. Losses and interest is deducted from my trading account in AU currency ? Do I only have trading account in AU currency or I will have trading account in US currency as well ? If I only trade in US, can I maintain my spare cash in AU currency or I need to maintain my spare cash in US currency as well ?


it will be easier if I describe a situation by using an example

Cash in trading account AU 10,000
21 Aug 2008 - Purchase XYZ share at US 10.00 for 10,000 unit. With margin lending of 5%. So I will need to convert AU to US 5,000. Assume conversion rate from au to us is 0.875. So I will need to convert AU 5,714 -> US 5,000.

Remaining cash in trading account AU 4,285

The next day I am still holding on the share and it drops US 0.10. Conversion rate is 0.875. Interest rate is 4%. Closing price for the share is US 9.90. So CFD broker will convert AU 1,142-> US1,000 to cover the losses. Daily interest calculated upon 4% of US100,000 is US 10.95. So CFD broker will convert AU 12.52 -> US 10.95 from my account to pay for the interest ?

So my closing position in my trading account is AU 4285 - AU 1142 - AU 12.52 ?

 

[Trembling Hand]

You don't have to do anything other than press the buy and sell buttons.

The brokers software automatically converts it for the transactions. All you have to worry about is having enough $$ in total to cover the margin.

The only thing that you have to worry about is once the trade is closed out any profit or loss will be left in the other currency. In this case USD. So at some stage you will have to ask the broker to convert it back to AUD.

Other than that it is all automatic. And market to market each day.

 

[winsonlee]

You don't have to do anything other than press the buy and sell buttons.

The brokers software automatically converts it for the transactions. All you have to worry about is having enough $$ in total to cover the margin.

The only thing that you have to worry about is once the trade is closed out any profit or loss will be left in the other currency. In this case USD. So at some stage you will have to ask the broker to convert it back to AUD.

Other than that it is all automatic. And market to market each day.

when you mention "once the trade is closed", does it mean that when the market is close or it actually means that when i sell the share ?

 

[Trembling Hand]

when you sell

 

[lasty]

If the share price is US10.00 and i purchase 10,000 unit, total cost will be US100,000. If the margin rate is at 5%, that means i need to convert AU to US 5,000 ? Do I need to maintain any $$ in US currency for the fluctuation of the share or all the remaining $$ can be in AU currency ?

They will convert it for you.
Its a paper trade.

 

[winsonlee]

when you sell

Since at any point of time you only maintain 5% of the margin of the current share price, does that mean that when you sell only 5% of the total cost of the share will be in USD and the rest will be in AUD ?

 

[Trembling Hand]

NO!!!!!

I will say it again. Only the profit or loss from a closed out trade stays in the other currency!!

 

[nat55]

Thanks Fab. E mini sounds great; especially the no dividend component. When I was trading CFD, one day, I was suddenly hit with a massive ex-dividend adjustment! Which broker would you recommend? I was with GFT. I had too many terrible times with them. Very unreliable.

Is anyone aware of other brokers who offer CFDs with no dividend ? i.e. just marketindex CFds