CFD Trading

David Trew, AVO and CMC Market's clients

Posted in Contracts for Difference CFD | Trading Services, Submitted by Trading Critic on Tue, 2008-07-01 08:06.
Electronic money trading - CFDs

Last weekend The Australian had a report about the CMC Market's Australia Managing Director - David Trew having to take out an AVO (Apprehended Violence Order) for a client. I've heard pretty bad things (rumours only) about CMC Market's clients and CFD trading. Nothing substantial. I guess this client took it to the next level...

It's funny how the news report about David Trew and the frustrated CMC Markets client was written. The report actually made the front page of the broadsheet's weekend issue with a massive photo of David Trew himself. The report infers that there is something fishy going on but doesn't really point fingers. It highlights how one client has taken steps to vent his frustration of losing money from trading. Then it highlights how CFDs is a little "shonky"/"shoddy" because it isn't allowed in USA, and it was used by a collapsed broker. and I agree that contracts for difference are "one of the riskiest financial instruments on the market". They are a double edged sword. The article ends in a slightly twisted note of how Mr Trew is living large while this bloke is obviously suffering financially.

The question is... what next? It is a highly "known" fact (well people always mention it but there are no numbers to back the statement up) that most traders lose money. With CFD's those losses are multiplied because of the massive leverage which is readily available. If you lose money from trading - especially trading CFD's you are personally at fault. You must accept that you, and you alone are at fault. Because you must do your own due diligence. CMC Market's have an easy to read PDS which explains the risks. If you can't handle the risks, or take steps to prevent those risks from eventuating, then don't trade. When the losses come and you can't accept it or handle it - don't trade. If you can't confidently take a risk on the market with your money - don't trade. If you haven't educated yourself about sound trading principles - don't trade. There is no such thing as a lucky gambler on the financial markets.

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Understanding CFD Trading - Part 3

Posted in Contracts for Difference CFD, Submitted by Trading Critic on Sat, 2006-04-08 06:57.

In Part 2: Understanding CFD Trading we had a look at some more basic mechanics of CFDs – Contracts For Difference such as the margin requirements for CFDs and some basic strategies that you can use when using CFDs to trade. In Part three we continue in our venture in looking at further intricacies and specifics in trading CFDs.

When you trade CFDs your position is leveraged which means you are controlling a much bigger underlying amount of value. As a consequence you either have to pay interest to maintain the position or be paid interest as a result of your position. When you have a long position – that is, when you bought into the position, you have to pay interest that is calculated and charged daily to maintain your position. On the other hand, if you have a short position – that is if you sold to enter into your position then you are credited interest. The interest rate you pay or receive is calculated to include a margin above for long CFDs or a margin below for short CFDs in addition to the going interest rate. For example, most dealers have a 2 per cent premium above the overnight cash rate; and currently in Australia (March 2006) our official cash rate is at 5.50 per cent – this means the dealer will be charging you or crediting you 7.5% per annum or 3.5% per annum respectively. So if you held a trade overnight, you would calculate the interest you’ll pay or be credited by multiplying: [Underlying value of CFD] x [Interest Rate + Premium] * 1[day] x 365 [days in one year].

Remember that CFDs allow you to short sell to make a profit if the value of the underlying equity falls. Normally, people recognize that with many things, you can make money on prices appreciating but CFDs as an instrument totally streamlines the whole short selling process. Before CFDs came along your broker would have needed to "borrow" the shares from somewhere to enable you to short a stock or other equity.

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CFD Trading: An Introduction: Part 2

Posted in Contracts for Difference CFD, Submitted by Trading Critic on Sat, 2006-04-08 06:55.

Contracts For Difference or frequently referred to as CFDs is a financial vehicle gaining in popularity with private traders for its flexibility and features. A CFD has many advantages and for any trader it is yet another useful tool to use in the business of trading. In this second part of our introduction to CFDs we have a look at what CFDs are and the part they play in CFD trading.

The CFD is simply an agreement between two parties to exchange the difference between the opening price and the closing price of an underlying share once the contract has been closed, this value being multiplied by the number of shares specified in the open contract. CFD trading uses this basic principle to make leveraged profits on today’s markets. It is estimated that nearly twenty per cent of the UK equity market turnover is based on CFD paper contracts compared to actual transfer of share ownership. When traders open a CFD trade they have the option to either open a long or short position. A long position is when the trader buys into the trade hoping shares to go up. A short position is when the trader sells to enter the trade hoping the shares will fall in price.

The contract value of a CFD is defined as the number of shares the CFD trader has assigned for the trade multiplied by the price of the underlying share from which the value of the CFD value is derived. A trader who has gone long into a trade will profit as the value of the underlying share increases. Conversely a CFD trader who has initiated a short to enter into a trade will profit from the falling price of the underlying share. A long CFD contract gives the trader no rights to acquire the underlying share and no shareholder rights but receives the dividends as well as the capital returns. A short CFD trade gives the CFD trader the profit for the falling shares but there is no contract requirement to deliver the underlying shares at any point.

CFD traders who open a position with their CFD provider aren’t obligated to pay the full underlying value of the contract. This fact lies in the heart of the biggest advantage of using CFDs for trading. The only money that is required to open a trade is the deposit funds also known as the margin or collateral. The margin you put up to open a trade depends on the CFD provider you choose as well as the liquidity of the underlying share. The level of margin is usually given as a percentage. The CFDs are usually ‘marked to market’ daily which means the CFD trader needs to ensure that the level of margin in their account every day matches with any changes in price of the underlying share. Traders would also pay interest daily on the full value of a long CFD trade since the provider has essentially financed the value of the trade. Conversely on short trades the trader would receive interest. These interest payments will also include a percentage fee for the CFD provider, so in long positions you may add two to three percent on top of the set interest rate and for short positions you would subtract that interest margin from the cash rate of the day.

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CFD Trading: An Introduction: Part 1

Posted in Contracts for Difference CFD, Submitted by Trading Critic on Sat, 2006-04-08 06:51.

Contracts For Difference or frequently referred to as CFDs is a financial vehicle gaining in popularity with private traders for its flexibility and features. A CFD has many advantages and for any trader it is yet another useful tool to use in the business of trading. CFD trading has been used in the UK stock market for a number of years now but the trading was largely restricted to large institutions. Recently the scope for CFD trading has expanded to include private investors in the action. This enables the small private trader to participate in trading the performance of a stock as opposed to owning the actual equity.

CFD trading has revolutionized the personal share trading industry by allowing traders to enter into a trade without putting up the full capital into the investment. Trading CFDs has allowed traders to have a low cost exposure to equity movements which is especially important for the trader’s bottom line. Depending on which country you’re in this financial instrument attracts no stamp duty. These unique CFD features are an attractive advantage for traders who make a living from the markets.

You must remember that CFDs are a derivative of an actual vanilla price. That is, CFDs derive their value as a result of the price of an underlying instrument or price – such as the price of the actual share or commodity. Therefore CFD trading encompasses gearing and hence this financial vehicle should be used with caution by beginners.

The origin of CFD’s began when the need of non market makers to be able to short stock increased in the 1990s in the UK equity market. This is the story of the beginnings of CFD trading. Before this push for CFDs by non market makers, only the market makers were able to short stocks and these were mostly large investment banks. The users of this system managed by the investment banks were typically the hedge funds, arbitrageurs as well as other funds utilizing neutral market strategies. Demand grew out of long contract transactions to be able to short stocks. No stamp duty is paid on CFD trading because no real stock transfer of ownership takes place. And as no actual change of ownership takes place, the trader does not have any ownership rights such as the right to vote. But on the other hand CFDs expose the trader to the real time performance of a stock price including dividends and corporate actions.

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