Join our investing community

CFD'S

Discussion in 'Investing Strategies' started by merlinnn, 30th May, 2010.

  1. merlinnn

    merlinnn Active Member

    Joined:
    1st Nov, 2009
    Posts:
    35
    Location:
    Brisbane
    Hi Eveyone,


    I have started playing around lately with CFD'S buying into various indexes and a few shares when they appear to be cheap. I have a limited risk account with guaranteed stops, which basically means I pay a penalty in the spread, but my losses are limited.

    Aside from the capital gains downfall when holding an investment for such a short period of time and the potential losses that one may incur with a fully fledged account, what are the downsides to trading CFD'S?

    At the moment there is no way I could lay down enough cash to buy a 1000 bhp or rio shares, so CFD'S seem like a good option.

    Does anyone else out there use them? and care to share their experiences?

    Do financial institutions use them or are they irrelevant when one has billions to play with?

    Cheers
     
  2. Tropo

    Tropo Well-Known Member

    Joined:
    17th Aug, 2005
    Posts:
    3,394
    Location:
    NSW
  3. jabba_jones

    jabba_jones Well-Known Member

    Joined:
    2nd Dec, 2007
    Posts:
    60
    Location:
    Sydney
    Hi Merlinnn,

    CFDs provide great leverage (0.5% margin on indexes, 2-5% on blue chips!!), great when markets go up, however the volatility at the moment can make things interesting, good thing you are using stops!

    Downsides:

    * No franking credits on dividends
    * You pay interest on the full position size which reduces the attractiveness of holding stocks long term through CFDs.
    * Some providers don't give true market rates (DMA vs MM)
    * Small margins means volatility is magnified!!

    As to my experiences with them, current volatility has knocked me out of the market. Current plan is to sit out of the market n build up some cash reserves again. I too like the index (interest free and no brokerage with great margins). Compared to an ASX200 ETF, i'll take the CFD as I'm prepared to forgo the franking credits for the advantages stated above.

    Most of the instos mandates would have them holding physical stocks and only use derivatives to get some additional alpha / de-risk a portfolio.
     
  4. Vagon

    Vagon Well-Known Member

    Joined:
    31st Mar, 2010
    Posts:
    56
    Location:
    Sydney
    If you are trading them frequently over the short term (with CFDs I'm guessing you are) then it will be treated as income and not capital gains.

    Jabba covered the downsides nicely.

    Cheers
     
  5. realestate_basket

    realestate_basket Member

    Joined:
    11th May, 2010
    Posts:
    12
    Location:
    Sydney, Australia
    I agree with jabba. With the current volatility in the market it's very hard to make a profit in CFDs. I also prefer trading index CFDs over shares due to the small spread and $0 commission. But still it's very tough recently.
     
  6. merlinnn

    merlinnn Active Member

    Joined:
    1st Nov, 2009
    Posts:
    35
    Location:
    Brisbane
    Definitely agree with the volatility! I find the index stops me out fairly often with its huge swings, also due to the fact that I have limited risk account one only has a certain range before it goes pair shaped irrespective of the indexes position at the end of the day.

    I am slowly realising that a small profit is always good as opposed to holding on for a few more dollars only to see the market swing violently the other way the following day.
     
  7. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW