Contracts for Difference

AK100,

I think we're just going to have to agree to disagree here fella! Granted, the way you break it down, the %age of comms Vs margin employed does seem a little on the high side, on the flip side I get massive exposure for minimal outlay. Leverage is never going to be provided for free, even by the best brokers.

Your example was indeed informative, but why would anyone employ only 4-5x leverage?! One might as well be trading S&P futures! I use both 10x and 20x leverage which allows my margin funds to go that much further in terms of exposure.

I see CFDs as a vehicle for active short term trading - cover costs, look for the best exit point, cash in and move on. But that's clearly not for everyone.

Mr Client who makes money in the market, but not his account, shouldn't (in my opinion) be in the market. If you don't know the rules of the game, how are you going to perform?!?

Thanks for the advice on Simon Smith. I will certainly research ABC as an alternative - not one I came across in my market research. Blue Index have been good to me and, whilst the costs may be improved upon, in my opinion the product is just about perfect.
 
But wait a second here. Isn't the real issue the fact that from what I have been told, more FTSE CFD's trade each day then FTSE Contracts?

The other thing neglected to be mentioned is the downside risk.

One can't trade leverage with the same kind of stops unless your very well capitalized. You have to use tight stops otherwise the leverage will blow your account.

What stops are better suited to CFDs? Can someone discuss this in this forum, because it might result in a decent discussion important for Traders.

Apparently in the U.S CFDs haven't been made legal because a Futures contract must have an expiry date otherwise its illegal. Stupid rule.

CFD's shorting doesn't require all your capital. You can hold many positions in stocks without having the capital tied up in one trade.
Very nice in a Bear Market
 
Spud

Simon Smith was a made up name used as an example, next time I'll use the name Joe Smoe.

Again I'm not having a go at you but you seem to think that leverage is a great thing. Well for 90% of people it's most probably one step better than Aids. And couple high leverage with astronomical fees and it's no wonder the majority lose.

If you use 10-20 times and pay those comms then I would say the odds against you are about 97% that you won't make money over time. Well, you may make money but the profits will all go towards paying the outrageous comms.

Hence you'll be working for your broker and paying him the privilege to do so (that's one worse than slavery because slaves obviously don't pay their masters!)

Let's look at your trade another way. You made a gross profit of £650 and paid £208 away in costs which is 32%! Yikes..........

It's the £208 that will likely force you out of the game because it's £208 taken off ALL profits and £208 added to ALL losses. Therefore the £416 swing is almost impossible to overcome over time unless of course your broker is very hot (no offence but there's a 90% chance that he's not). Of course in this example I realise that comms will vary and so will p&l.

Do yourself a favour, don't focus on your profits, forget about them. Just concentrate on how much money it costs you to pick up the phone (keep a running total of this) and I guarantee you you'll be shocked by the summer and realise that the odds are truly stacked against you.

Remember those in the City are expects at the big con, that being when the people conned don't even realise it and keep coming back and back for more.
 
Firstly, for psytrade, the stats I've heard are that it's between 30-40% of daily trade. Made up largely of Hedge fund trading.

Clearly the downside risk is equal to the upside gains. I use stops of between 1-2.5% depending on the volatility of the stock.

I can't understand why they're banned in the states. I was under the impression that CFDs are rolling spot forwards (hence the lack of expiry) but then so are many forex contracts, which are allowed to trade in the states. NFA can be very annoying! I'm sure once stateside gets involved, then the costs will have to come down and AK100 may even get back in the game!

In the mean time, I would ask if you have any suggestions for a better employment of my capital in the markets. Granted the risks are there (but aren't they always?!) and the costs are unavoidable, but where else can you get similar exposure with similar risk capital??

I agree with your view that it is useful to focus on costs, and I will be contacting my broker at Blue Index for a reduction today. But I do think that it's an unavoidable aspect of such a flexible way of trading.
 
AK100,

With long positions you have to pay the interest, but with short positions some brokers such as CMCgroup pay you interest.

I believe the reason they do this is to balance their exposure becuase more people trade long than short, so for every long position a client takes the CFD provider offers the same amount for short sale.


This really makes CFDs viabale for short selling, particularly those stocks that can't be shorted in the real market.

They pay about 2.5% on your total exposure, which at 10 to 1 leverade is a handy 25% per annum. Just don't be short when the stock goes ex-div.

So while your right about long positions, short positions are much more advantagous.

Runningbear
 
Runningbear

All brokers will pay you interest on shorts otherwise they are nothing more than thieves. And it has nothing to do with balancing a book it's all about you being short stock and long cash.

Also it doesn't matter if you're short when a stock goes ex div because although you'll have to pay the dividend the stock will fall by around the same amount. There may be a slight disadvantage though but it's in pennies not pounds.

Also do you sums correctly because there's NO WAY you're going to get anything like 25% in interest being short because otherwise all you'd have to do to make a fortune is sell stock short with a 25% upside stop (ok, this is simplified but it makes the point). The actual interest you'll be paid is around 2.5% PER ANNUM.

(Bear, my mistake - see post below)

Going long or short cfds doesn't matter anyway when the comms are so high. Pretty much whatever you do will be eaten up in costs.

Look at it this way.

Buy 1 FTSE future at 4500
Nominal cost of stock =£45,000
Comm = £1.50

Effective comm rate basis asset controlled = 0.0033%

Buy £45,000 of ISF (FTSE 100 ETF)
Comm at 0.5% = £225 or even if costs are at 0.1% that's £45.

The difference of £223.5 is why most CFD traders work for their brokers and not the other way around.

Spud, The US do offer CFDs it's just that they call them equity swaps, same products different names. Also they're not offered to the retail which for them is a blessing in disguise.

For all you retail CFD traders out there do yourself a favour, forget about your P&L and just concentrate how much it's costs you to trade. Do this for a few months and you'll be shocked when you see how much this is as a % of your overall cash balance.

I know these things because I used to get small cheques every month from my futures broking clients but massive ones from my CFD ones. On the desk we used to say that a client had about an average life of 6 months before the cost of doing business caught up with him and he clicked that something was wrong.

Of course though, always exceptions to the rules but in CFDs not many.

My advice, get comms down to a maximum of 0.1% and use less leverage. Better yet forget about CFDs and trade US shares with IB.
 
Bear

Sorry I misunderstood what you were saying.

Yes at 10-1 you would receive 25% in interest re your initial £10,000 in cash.

Sorry for my mistake.
 
incidentally there's a lot of talk in the press so far this year (from heavy hitters like the Business editor of the Times) saying that CFDs are wrong because they evade stamp duty which is a mega earner for the Treasury.

It will be interesting to see what happens over the next year. Treasury has a difficult balancing act because although it's losing money from the non-payment of tax just how much is it making from taxing the CFD broking operations themselves (corporate tac, personal income tax of the brokers etc).

But the main point now is that CFDs are known outside of the City which they weren't a few years ago.
 
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