Index CFDs

[ocd]

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.

 

[money tree]

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

 

[Milk Man]

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.

 

[RichKid]

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.

 

[doctorj]

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.

 

[mit]

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

 

[Milk Man]

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

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.

 

[mit]

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

MIT

 

[Smurf1976]

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.

 

[money tree]

mit you make it sound like 7.5% is a lot

most people with margin loans pay more than that!

 

[randomtrader]

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?

 

[wayneL]

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.

 

[mit]

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

 

[mit]

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

 

[money tree]

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

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

 

[Kauri]

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.

 

[mit]

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

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

 

[mit]

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

 

[Whathell]

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

 

[mit]

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