Trading CFDs

[Kauri]

Re: Trading CFD's

I only trade the DMA product now where obviously the providers profit is made on the interest and commission charged.
When I traded in CFD's there was no commission or interest charged,( what is the interest charged on?), the spread between the price quoted by the CFD provider and the price in the actual market, and also the spread between their buy/sell quotes is where they aim to make their money. What you are doing when you buy CFD's is Betting $x per point that the chosen instruments price will rise/fall, hence the term spread betting. Like any good bookmaker they know their exposure to any given share/instrument,sector,market, and either back their opinion and take on the risk or alternatively do the sums and hedge their position in the market accordingly. Just my understanding of how it works, no guarantees that I am correct.

 

[professor_frink]

Re: Trading CFD's

Hi Broadside

I don't trade CFD's so can't help much there - but have looked at it to hedge option trades, and found the fees are unaceptable when compared to the flat rates I get with OX and Morrisons. For example, to just buy 5000 CBA CFD's (covering 5 options)would be approx $220,000 worth of underlying -multiply that by their percentage based fees! Margin lending with Morrisons is a much better deal where I get the $30 flat fee.

I was refering to the above situation- sorry didn't know they have started offering flat fees.

sorry to say the house always wins does not give me confidence in a cfd provider's ability to cover its risk,

Very good point. Nor should it. I said that refering to them hedging their position- the fact is that most traders lose over the long term, so it wouldn't make sense for them to hedge all the time, unless the trader has a good track record with them, in which case they can hedge and break even on the trade and still make a profit out of brokerage and interest.

granted there are other ways to get the same exposure using options etc but not all stocks offered for cfd are ETOs, cheers professor.

Also a good point- Was the reason I looked at trading cfd's for awhile! It was only after I read through the PDS for some of these companies that I decided not to go ahead. I found it to be fairly disturbing reading, and would recommend to any aspiring cfd trader to go through the provider's PDS thoroughly before they begin.

 

[robots]

Re: Trading CFD's

hello,

how do CFD providers hedge a traders position?

for example, if I short TLS , what do they do?

look forward to a response

thankyou

robots

 

[Broadside]

Re: Trading CFD's

that is exactly the same thing I am wondering

 

[professor_frink]

Re: Trading CFD's

hello,

how do CFD providers hedge a traders position?

for example, if I short TLS , what do they do?

look forward to a response

thankyou

robots

Don't know for sure, but one way they could do it is take the same position in the underlying share. For example if you are long a stock, they could also buy the underlying- if you make 3%, so do they, giving them a neutral result on the trade, with a profit after they charge brokerage and interest. Short- I'm not so sure on as it's not exactly a common thing on the ASX.
Don't know any of this for sure but so don't quote me on it!

 

[Porper]

Re: Trading CFD's

Don't know for sure, but one way they could do it is take the same position in the underlying share. For example if you are long a stock, they could also buy the underlying- if you make 3%, so do they, giving them a neutral result on the trade, with a profit after they charge brokerage and interest. Short- I'm not so sure on as it's not exactly a common thing on the ASX.
Don't know any of this for sure but so don't quote me on it!

Trading with IG Markets this is exactly what they do.

For example if you bought 50000 MGX as a cfd they will place an order to buy 50000 in the market (supposedly anyway), whether they actually always do this I doubt, but that is my opinion only as I haven't checked this out.

 

[Broadside]

Re: Trading CFD's

yes I understand they could hedge this way but I have never seen depth in SEATS change as a result of my trades so it makes me wonder

 

[YOUNG_TRADER]

Re: Trading CFD's

Hi there,
Have been looking @ CFD's for awhile now am considering giving them a go.

I have beend looking at the main 4 providers,

IG, CMC, Macquarie and Man Finanacial

As far as resource stocks go, Macquarie requires a margin of between 10% - 45% (45% almost defeats the purpose of leverage), but are obviously secure because they are backed by Macquarie and offer DMA with some GSL and shorting,

CMC seem to be the most flexible ie very little margins required, huge leverage allowed (ie lose more ) Stop losses?
They creat their own market spread? so not DMA, I gather that this is bad as they will always construct the spread so that they win long term.

Don't know much about IG or Man Financial


I would be interested to know how others are finding their CFD providers, how realiable is the software, how realiabe is the provider, how quickly do they transfer funds etc etc


Thanks in advance

 

[YOUNG_TRADER]

Re: Trading CFD's

I really like IG markets,

Very low margins on resource stocks I like, much better tahn Macquarie and the allow GSL (with slight premiums)


I like!


How have people found IG Markets, especailly their L2 DMA System?

 

[Bobby]

Re: Trading CFD's

I really like IG markets,

Very low margins on resource stocks I like, much better tahn Macquarie and the allow GSL (with slight premiums)


I like!


How have people found IG Markets, especailly their L2 DMA System?

Hi Young Trader,

How do you find them, when you need to get your Own money out quickly ?

Bob.

 

[stink]

Re: Trading CFD's

HI All,

Having read this thread from start to its current life, i still have a question.

How is the actual CFD trade conducted? I mean i assume an investor makes the decision to buy or sell much the same as you would when trading a stock. But from that point how does the cfd trade differ?

I am aware of the risks of CFD's with leverage etc, and i have no intention of over extending just because the option is there. I have been trying to find some good reading material and it seems there is alot on the risks etc but cant find much on the actual process.

Cheers Stink

 

[robots]

Re: Trading CFD's

hello,

you buy/sell at their current offer (cfd providers offer), which typically is around market price of the share/index (give or take a few points).

remember your are entering into a contract with the CFD provider, it has nothing to do with anybody else, your not buying/selling physical shares

then you sell/buy to close the position with your CFD provider and the difference is what loads your pocket or cleans it out

thankyou
robots

 

[stink]

Re: Trading CFD's

So when you say within a few points do you mean within a few cents of the market price of the share in question?

Sorry about the dumb question mate!

Cheers Stink

 

[robots]

Re: Trading CFD's

hello,

yes

for example, the CFD providers would show lets say BHP as

2750 (ie $27.50), everypoint (cent on the ASX) movement would influence your position

thankyou
robots

 

[porkpie324]

Re: Trading CFD's

there seems to be a lot of talk on CFD spreads, i trade both shares physicilly and using CFD's, i use CMC markets and ASB securities for shares, i also use 2 computors working online at the same time. Now the quotes are exactly the same also when they change both change at the same time, i do know though that the brokerage is less for CFD's. porkpie

 

[Magdoran]

Re: Trading CFD's

yes I understand they could hedge this way but I have never seen depth in SEATS change as a result of my trades so it makes me wonder

Have you considered that they might be hedging in the futures markets and/or the ETO markets (both stock and index options), or alternatively you may not see all the order transactions in the CFD itself? Don’t forget they cover a range of markets.

They could also be dealing in the OTC markets using a range of structured financial products all over the world; perhaps they hedge in other countries where there is “spread betting” like in the UK for example. It’d be interesting to know if anyone has inside knowledge on what the strategies for various CFD providers are.

What concerns me is how well they are underwritten/hedged in the event of a crash.


Regards


Magdoran

 

[rookie]

Re: Trading CFD's

Guys,

This thread is quiet interesting and also very useful.
I read all of the posts but I still have some questions left unanswered about trading CFDs.

1. CALCULATING THE RISK.

How can I calculate my total expenses on CFD trading?
I had a look at charting tool of CMC Markets and it is quite a joke. That's good for someone who knows nothing about charting but drawing lines and curves keeps him happy.
Saying so I think I still would need to pay for quality EOD or intraday price feed. That costs for about $300-400/year.

Just to keep the calculation simple and because I'm not very well capitalised, let say I have $10K to try my luck on CFDs.
So, I came up with the following calculation.

$10 000 * 0.01 = $100 to risk on a single trade (1% of $10 000)
$100 - $20 (buy&sell commissions) = $80 left to a single trade.
I have a full time job so, I just can't look at the price changes on a daily basis. That's why the only option left for me is position trading.

With $80 margin and 95% leverage I can buy $1600 worth of CFDs.

Let's say, the average holding period of a long position is about 5-10 days.
The overnight rate that the CFD provider charges is 8% (Current RBA rate=6% + 2)
Interest on a long NAB position:
$1600 / $36 = 44 share CFDs

(8%/360 = 0.02222) * $36 * 44 = $3.51 / night

$3.51 * 5 days holding = $17.5
$80 - $17.5 = $62.5 to invest ...

If I want to leave the position open for a couple of days then I should put GSLO just slightly below the buy price I guess to protect my capital.
That usually costs heaps of money.
Do you guys buy it before the market closes to protect your position from a sudden gap on the next day?

Becuse I have this tiny amount of margin to invest into a single position I must put a very tight stop loss order to every trades,

soeven the smallest price movement into the wrong direction would close out my trade.

Is my calculation correct? Is there any other expense that I have to calcualte with in order to aviod nasty surprises?

I know that a lot of professionals recommend to have at leat $50K that someone can afford to lose in CFDs, but if I had that money then I would by my first home instead of risking it on CFD trading...

2. HOW TO AVIOD/CALCULATE SLIPPAGE?

Slippage is an unknown factor when someone jumps into a position except if it's a blue chip stock. That case the market depth and the volume should give a good indication that at what price we can expect to close the position.
Is it really the case? Can I still somehow prepare for the most likely sell/buy price before I open a long/short position?
I guess I have to calculate my risk on every single position with the most likely closing price.

3. WHAT ARE THE TAXATION REGULATIONS ON CFD TRADING?

My wife doesn't have any taxable income as she's staying at home with the kids. Should I open the account under her name to get the tax advantages or this sort of income is taxed on the highest rate?

4. EX. DIV DATES?

Do you guys check the ex. div dates before you open a long/short position? Do you take this into account to calculate your risk/revard ratio?

5. WHAT'S THE CFD PROVIDER'S REAL INTEREST?

AFAIK the CFD providers are not liable to hedge their customer's position on the stock market. Does it mean that the system has been built around an unfair game? The interest of the CFD providers is to wipe out it's its cusmers' account because they want more then just the commission and extra fees and charges.
I'm pretty sure they even have in-house traders to move the prices by only 1-2 ticks to get most of the positions with tight stop loss limits out.
They don't want to risk the positions of their well capitalised big customers of course that pay a lot of money to open and close heaps of trades. But these customers can afford to have a much wider stop loss order or not to have any at all, then the DIY customers.
Am I just too paranoid?

6. MISC

What happens in that unlikely case when I can't sell my CFDs because the provider suspended the trade of them?

Thanks guys in advance! I really appreciate your help and sorry if I asked a lot of stupid questions.

 

[scsl]

Re: Trading CFD's

Let's say, the average holding period of a long position is about 5-10 days.
The overnight rate that the CFD provider charges is 8% (Current RBA rate=6% + 2)
Interest on a long NAB position:
$1600 / $36 = 44 share CFDs

(8%/360 = 0.02222) * $36 * 44 = $3.51 / night

$3.51 * 5 days holding = $17.5
$80 - $17.5 = $62.5 to invest ...

-----

3. WHAT ARE THE TAXATION REGULATIONS ON CFD TRADING?

My wife doesn't have any taxable income as she's staying at home with the kids. Should I open the account under her name to get the tax advantages or this sort of income is taxed on the highest rate?

-----

I'm pretty sure they even have in-house traders to move the prices by only 1-2 ticks to get most of the positions with tight stop loss limits out.

rookie, the interest you calculated is incorrect. Although unlikely, let's just assume the NAB sp stays at $36 and the total size of the open position is $1,600. The interest per day would equal $0.35.

1600*8% = $128
128/365 days = $0.35

So if you held for 5 days, 0.35*5 = $1.75 would be debited from your account.

-----

Profits from CFDs is classified as income and is taxed the same way capital gains and dividends from owning traditional shares are. Having said that, expenses associated with trading can be deducted.

-----

This rumour that CFD providers widen spreads could be true. I remember asking my client adviser at IG about this and he said that it still happens sometimes but is a lot less frequent these days. I also have an account with CMC and having checked the prices of these two providers compared to the underlying market on seperate screens, I have yet to see this in action.

cheers,
scsl

 

[TraderPro]

Re: Trading CFD's

hello,

how do CFD providers hedge a traders position?

for example, if I short TLS , what do they do?

look forward to a response

thankyou

robots

Correct me if I am wrong...

I think DMA players like IG Markets and Mac Bank CFD's actually place real orders on the markets to hedge themselves....

But with CMC Markets and other marketmakers they either accept the risk, synthesise the market prices and perhaps also buy the underlying stock to hedge themselves...

 

[porkpie324]

Re: Trading CFD's

rookie, if this can help, i have been trding CFD's now for 62 days i use CMC mkts, i went to a 1 hr introdution promo talk, was quite impressed so i opened an a/c there and then, i trade both shares and the SPI, i think it helps to have some sharetrading experiance and know which shares to trade, at the moment i'm keen on the nickel stock CFD's so i stick to them,up to now my a/c is up quite substantially so i'm quite happy to contiue on the CFD route.
as for the CMC mkts platform i find it ok, but i do use metastock for daily data and to make decisions on which stocks to trade and cmc mkts platform for intra day trades. the thing i like about CFD's is you can trade small ammounts especcially on the SPI where you can trade just 1 cfd for a dollar a pip so its a good place to start, porkpie