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CFD's vs Margin loans for long term holding

Discussion in 'Investing Strategies' started by Glebe, 12th Oct, 2006.

  1. Glebe

    Glebe Well-Known Member

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    G'day there,

    I haven't bought or sold a CFD before and I realise they're used by most people for trading, but I'm wondering if anyone is using them in a buy and hold strategy?

    offer direct market access CFD's (meaning shares in XYZ are actually bought) so you get dividends and offers etc just like a normal shareholder (but unfortunately you don't get franking credits). The leverage available is staggering - 97% for blue chips through to 1% for little dodgy buggers:

    http://www.fpmarkets.com.au/docs/FPM CFD Instrument Listing.pdf

    The interest rate is higher than a margin loan, but not that much. With FP Markets they charge RBA Cash rate (6.00% currently) + 3% - so 9% interest currently.

    CMC Markets - Australia charge RBA Cash Rate + 2% - so 8% interest...

    Considering you can get CFD's on the Streettracks ASX200 stock (STW)
    why would people rather get 50% leverage through a margin loan at a similar interest cost when you can get 83% leverage via a CFD?
     
  2. FrankGrimes

    FrankGrimes Well-Known Member

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    Would also like to hear other peoples thoughts on this. I would love to gear more heavily into LPTs.

    Glebe, have you had any further thoughts on this?
     
  3. Glebe

    Glebe Well-Known Member

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    Hi Frank,

    Still researching this, when I can steal some time..

    Basically some downsides...

    * No franking credits - your profits are treated more like trading profits. You can work around this by selling before they go ex-div, but I'd rather not..

    * Stop losses cost money - the CFD providers seem to charge fees for stop losses, and I've heard of some providers not allowing trailing stop losses.

    * Since your contract is with a third party, and you don't actually own any underlying shares, what happens if said third party goes into receivership/bankruptcy?

    * Margin calls - whilst traditional margin lenders have a buffer and can give you a few days to come up with the money, with CFD's the providers often want money immediately.

    More here: Aussie Stock Forums - Trading CFD's
     
  4. Tropo

    Tropo Well-Known Member

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    CFD

    Guys,

    Few main points :

    CFD is only for traders interested in the daytrading and / or short term trading (1-5 days).
    It’s not for buy & hold strategy.
    You can choose between Synthetic and/or Direct Market Access.
    In the first case providers using synthetic pricing – so they take base market data from SEATS and modify it. The spread is calculated by internal CFD model. Sometimes spread is wide (.06p). They do not trade physical Market so they do not have problem to deliver guaranteed stop loss.
    The second one ( DMA) is an replica of the SEATS market (same spread as per SEATS screen).
    The basic difference is the possibility to sell short with limited amount of stocks which can be shorted. The biggest limitation is no guaranteed stop loss.
    Guaranteed stop loss costs quite a bit and overnight holding cost you an interest charge as well.

    Practically you are trading by the rules of CFD provider not by ASX which is closely regulated industry unlike CFD.
    IMHO it is a purely speculative market.
    :cool:
     
  5. Glebe

    Glebe Well-Known Member

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    That's what I keep hearing but I want to know why?
     
  6. Tropo

    Tropo Well-Known Member

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    One of the few reasons is finance cost.
    Finance cost = (Value of holding x interest rate)/days in year.
    Say: You bought 7000 XYZ CFDs at $4.
    [(7000x4)x7%]/365 = 5.36% cost of holding overnight.
    In this case 7% = (6% cash rate + 1% margin cost) – each CFD provider calculate interest rate in the different way.
    You require to pay interest rate (if you are long) on the value of your holding, each time a position is held overnight.
    Finance cost will impact upon the profit or loss of the trade.
    Also stop loss cost money and commission as well which is calculated on the total value of the position.

    PS - When you trade CFDs you are not trading the stock market.
    Not long ago I heard that CFDs are banned in the USA….
    Makes you wonder…why eek:
    :cool:
     
  7. Glebe

    Glebe Well-Known Member

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    You mean $5.36 per day not 5.36% - big difference!

    Yeah that's something that struck me as being funny, I didn't know if I was reading it right but you think it too..

    You pay interest on your total position not just on your loan! You pay interest on your upfront contribution - that's absurd!

    Ah yes but lets not forget I'm not talking about trading, I'm talking about holding.

    Thanks Tropo, it seems that CFD's aren't really for me.. for now... :)
     
  8. Tropo

    Tropo Well-Known Member

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    You mean $5.36 per day not 5.36% - big difference!.

    O yes… In this case is $ 5.36 NOT 5.36%. Sorry !!.
    Generally, traders who trade long with CFDs pay interest overnight for every day the trade is open approx. 8.5% (percent) more or less….
    Those who trade short are paid for their open position approx. 3%-3.25%. This has a relatively small impact on risk/money management of short trades. But if you are willing to hold, impact may be quite big.

    Yeah that's something that struck me as being funny, I didn't know if I was reading it right but you think it too..
    You pay interest on your total position not just on your loan! You pay interest on your upfront contribution - that's absurd!


    Hahahaha. It’s not an absurd. It’s a highway robbery (IMHO)…
    Also if you have got open position for a few days, guaranteed stop loss (if you use it) may cost you (in some instances) more than $ 700 alone !!.

    Ah yes but lets not forget I'm not talking about trading, I'm talking about holding.

    If you consider cost and nature of the CFDs, you may discover that holding is not an option !!.

    Thanks Tropo, it seems that CFD's aren't really for me.. for now...

    My pleasure !!.
    If you enter this game one day remember that you must play by the rules set by CFDs providers.
    Until than …. Stay :cool: :cool:

    PS-If you read some books about CFDs, you may not find any info about disadvantages of CFD trading, so this makes me wonder ….. is it possible that author/s has a close association with some of the CFD providers ??. :eek:
     
  9. perky

    perky Well-Known Member

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    Let me say this - one thing I very much like with CFD's is leverage.

    Lets say you really liked 2 zinc stocks - such as KZL and CBH.

    Under the CFD provider - KZL is a 10% margin (so 90% lend). This has gone up from 6.12 last week (I got in at 6.20) - and is now at 7.09.
    Bought as a CFD - that 97c gain equates to over 15% .
    If you had bought this share on Comsec under a margin loan , you would have to fund 60% (not 10% as with the CFD provider) - so you could buy 6 times as much. Nice little return that ;)

    CBH - you need to fund 30% under the CFD provider - and Comsec will not even do a margin loan at all. That one has climbed a mediocre 10% this week :cool:

    So do your sums, you will see that (if picked correctly of course!!) the CFD works out better. The interest rate is also 8%, which is not bad.

    I understand that paying interest on your own money to the CFD provider is not great (like CBH 30% that I have contributed towards the trading position) - and my LOC which funded the trading account (so extra interest!!) - but the leverage more than makes up for it.
     
  10. Tropo

    Tropo Well-Known Member

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    Good on you Perky,
    Yep.....leverage is a very good invention. I like it too...:D
    If one day you compare warrants with CFD you may be pleasantly surprised considering difference in cost and gain.
    Anyway...Keep on going :p and watch out for running stops, and suddenly widened spread when trying to exit open position.:rolleyes:
    HAPPY TRADING !!!!....
    :cool:
     
  11. perky

    perky Well-Known Member

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    You might want to show me how warrants work one day !!
    Today not such a great day - kzl/zfx up, but cbh and worse still pdn down quite a bit. Oh well....
     
  12. Tropo

    Tropo Well-Known Member

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    DEAL !!. :p
    Manage Your RISK !!!!!!!!!!!:cool: :cool: :cool: :cool: PLEASE !!!!!.
    :cool: +:cool: = 2:cool: