CFD Trading

[shark1963]

Can anybody explain me what is the advantage of CFD Trading compared to trading the share.I just downloaded the trading software from saxo and got a call if i would also do CFD Trading.The polite woman who called me recommended highly to trade with CFD´s.I read a bit about CFD´s but i am not sure if i got it right.Any info and advice would be nice

[Patrice2704]

Cfd ??????

[shark1963]

Originally Posted by Patrice2704

Cfd ??????

Thanks patrice, this was my first reaction too But at least i know already what CFD means ( Contract for Difference)

[Patrice2704]

Contract for Difference


GCI Financial Ltd - Online Forex and CFD Trading

[K2]

Firstly Shark have to say that if you don't understand the product your trading then DON'T trade it.

With the risk warning out the way - advantage of CFD's over stocks is that you have higher gearing since you trade on margin and the trades are settled only on the difference between the price (traded) in and the price (trade (out) so you no don't need to actually stump up the money to pay for the underlying stock. Higher gearing means (much) higher risk.

Hope you've got some good money management skills honed down - then have some consistant methodology for trading what ever you choose for time frame.

Good luck.

[JayBee]

It seems to me, that CFDs are out and out gambling, as opposed to investing, since you never really own anything, but are just betting on whether a stock's market price will rise or fall.

[Patrice2704]

An interesting article about risk involved....leave it to the Pros!

CFD Dealing - CFD trading - online CFD markets - Interactive Investor

[LivinLOS]

Originally Posted by JayBee

It seems to me, that CFDs are out and out gambling, as opposed to investing, since you never really own anything, but are just betting on whether a stock's market price will rise or fall.

How is that different from buying or selling a stock ?? Only thing is the higher leverage..

As someone once said to me.. Your always long something by selling a stock your going long currency.

[shark1963]

Originally Posted by K2

Firstly Shark have to say that if you don't understand the product your trading then DON'T trade it.

With the risk warning out the way - advantage of CFD's over stocks is that you have higher gearing since you trade on margin and the trades are settled only on the difference between the price (traded) in and the price (trade (out) so you no don't need to actually stump up the money to pay for the underlying stock. Higher gearing means (much) higher risk.

Hope you've got some good money management skills honed down - then have some consistant methodology for trading what ever you choose for time frame.

Good luck.

Thanks K2, wont do that and i am just doing a research about CFD´s and how to trade them. Wont do it if i dont know enough about it. What i know now about CFD compared to a stock:

Simplified example:

Lets say i have 10k eur to invest. The stock is traded for 100€ so i could buy 100 stocks. The trading fee´s (buy/sell) are 0.4 % + 10€ for each trade

I could also buy a CFD of that stock with a margin of 10% (depending on wich CFD/stock). No trading fee but an interest rate.

With the CFD i would have now 2 possibiltys:

A) I buy 1000 CFD´s (1000 x 100 x 0.1) = 10 k
b) I buy 100 CFD´s (100 x 100 x 0.1) = 1 K (9k € left for other invests)

Case 1: stock goes up to 110

stock = 100 x 10 = 1000 € - (40 + 44 + 2x10) = 896€ profit
CFD A = 1000 x 10 = 10.000 € - fee 180 € = 9.810 profit
CFD B = 100 x 10 = 1000€ - 18 € = 982 €

Case 2: stock goes down to 90

stock = 100 x 90 = 9000 - ( 40 + 26 + 2x10) = 8914 = 1086€ lost
CFD A = 1000 x 10 = 10.000 + 180 = 10180 lost ( bye bye money and bring some extra cash)
CFD B = 100 x 10 = 1000 + 18 = 1018 € lost


So if i dont use the gearing i might trade better with CFD´s for short time, as i have to look on my daily fee´s. Using the whole capital for the gearing can mean the lost of all, but also high profit.Also that CFD´s are for short time invest whilst shares are for long time.

My example is a bit easy, but did i get the point in general?Any more info would be appreciated

Thanks all for your help

[dizbuster]

Originally Posted by LivinLOS

How is that different from buying or selling a stock ?? Only thing is the higher leverage..

As someone once said to me.. Your always long something by selling a stock your going long currency.

Dividends, Rights Issues, Sell-Buybacks, Preferential Share offers...amongst other things.

[K2]

Simple examples are good Shark - you shown there the advantage of CFD's is that the gearing means you can have bigger position with smaller stake - however when you get the market direction wrong - you will also take a bigger hit.

All decent CFD brokers (EDF Man, Cantor, City Index etc) will adjust prices to reflect dividends, stocks splits etc on the underlying stock.

As basic outline of money management:

- Dont risk more than 5% of your available trading capital on any single position.

- Don't invest in more than one stock in any sector - diversification spreads risk.

- Think in terms of percentage return (loss) rather than absolute money terms, this will ensure you standardise your trades.

- Trade with stops and NEVER change you stop - its OK to cut a bad trade early before it hits your stop, but never let a bad position become a terrible position. Losses are normal - get used to taking small losses and run your profitable trades.

Money management is easy enough to learn - but needs discipline to stick with it.

The next factor is trading strategy - everyone is different and it will take time for you find a methodology that you feel comfortable with and this I can't really advise you.

[LivinLOS]

Originally Posted by dizbuster

Dividends, Rights Issues, Sell-Buybacks, Preferential Share offers...amongst other things.

Sorry I should have been more explicit..

I mean how is that any different meaning 'its pure gambling' as opposed to the idea that buying or selling a stock in 'investing'..

Yes I agree of course that owning a CFD is not the same os owning a stock.. I meant that really they are both gambling (or investing) on a price rise or fall based on perceptions of how the company will do. Niether seems more gambling to me than the other although one comes with much more leverage..

[LivinLOS]

Originally Posted by K2

- Trade with stops and NEVER change you stop - its OK to cut a bad trade early before it hits your stop, but never let a bad position become a terrible position. Losses are normal - get used to taking small losses and run your profitable trades.

Unless sliding stops up behind a winning trade !!!

[K2]

Originally Posted by LivinLOS

Unless sliding stops up behind a winning trade !!!

Yep - good point S (I'm not firing on all cylinders at the moment mate - recovering from last night).

[Sirgezza]

Is a CFD like a TRADED OPTION?

[shark1963]

Originally Posted by gez

Is a CFD like a TRADED OPTION?

If you mean call or put options, NO. Whilst a call/put has a specific basis (i.e. microsoft call 28 /0.1/ 10.12.06) amount and an experiation date, a CFD is it own basis. But you dont buy the share,but you trade on the difference between the price you bought and the selling price.

[Sirgezza]

Originally Posted by shark1963

If you mean call or put options, NO. Whilst a call/put has a specific basis (i.e. microsoft call 28 /0.1/ 10.12.06) amount and an experiation date, a CFD is it own basis. But you dont buy the share,but you trade on the difference between the price you bought and the selling price.

Calls and puts yes, but as it is traded, you can buy and sell them any time up to the expiration date. As you obviously know, you buy a contract for the RIGHT to either buy or sell a stock at a predetermined time. This is also very highly geared and you do not actually buy the stock (until expiry??) It just sounded that there are similarities between CFDs and options.

[shark1963]

Originally Posted by gez

Calls and puts yes, but as it is traded, you can buy and sell them any time up to the expiration date. As you obviously know, you buy a contract for the RIGHT to either buy or sell a stock at a predetermined time. This is also very highly geared and you do not actually buy the stock (until expiry??) It just sounded that there are similarities between CFDs and options.

your are right, both, the CFD and the call/put option,are contracts on a stock. Whilst with CFD you speculate on prises going up (no put option) and you dont have experiation date of the CFD. For the difference between the margin and the buying price of the CFD you pay interest .So the CFD doesnt have an experiation date but its also no long term invest, as the interests can grow over the profit. Also when the price is falling you dont have lost limit (of course you set a stop loss) as you option is just expireing.

[K2]

Originally Posted by gez

It just sounded that there are similarities between CFDs and options.

Gez - no real similarities between options and CFD's.

Stock options are exchange traded so you have transparency over the market and dependent on weather you are option buyer (limited risk of price of option paid) or option writer (unlimted risk of market movement in the underlying stock) and trade either European (less common) can only be exercised on date of expiry or American which can be executed any day up to expiration.

A basic outine see here:

Option style - Wikipedia, the free encyclopedia

But if serious about option trading (I used to be a FX option market maker) then read 'Options, Futures, and other Derivative Futures' by John C. Hull (Prentice Hill Pub.) - best book I've read on option trading and very useful - I'd buy the author a few 100 beers for the help its been to me!

CFD's - are not exchange traded (no transparency) and you effectively buying or selling the underlying stock in highly geared form, but drawback is that the broker (market maker) is making a price - so the spread may well work out more than the brokerage you'd pay in regular stock trade or for exchange traded options. As Shark says the CFD (Contract for Difference) is you pay/recieve the difference between your entry and exit trade prices based on your nominal stock holding times position size taken (less cost of carry or interest charged).

Option trading is by far more complex - CFD's are more akin to basic stock trading - but both have one thing in common ..... ~85% of punters losse money!

[JayBee]

Originally Posted by LivinLOS

Sorry I should have been more explicit..

I mean how is that any different meaning 'its pure gambling' as opposed to the idea that buying or selling a stock in 'investing'..

Yes I agree of course that owning a CFD is not the same os owning a stock.. I meant that really they are both gambling (or investing) on a price rise or fall based on perceptions of how the company will do. Niether seems more gambling to me than the other although one comes with much more leverage..

Of course, many of us use the stock market as a way of gambling, since there is the element of risk undertaken, and the prospect of gain or loss thereby.

However, even when acting as short-term speculators in the market, we are contributing to the liquidity factor that helps the market operate smoothly. We have money in the market, and that helps make a market. We are invested in our economy, and although we may move the money around a good deal, still, even short-term traders have much of their money invested at any given time, trading it from one group of stocks to another, which is why they are called traders. But even those who are strictly in and out, and never leave money on the table overnight, still contribute to the volume of trading, and as you know, volume is an important element to consider when looking at stocks, especially small caps and micro caps.

But beyond the short-term traders, there are a lot of people who put money in stocks and let it sit there for 20 or 30 years, collecting their dividends along the way. Of course, they hope to get good appreciation on their investment. If they pick good companies whose profits grow, then people will appreciate that record of accomplishment, and they will get appreciation on their investments. This is called investing in stocks, and is not gambling at all, IMHO. A well-diversified portfolio will make money, in time, and that is a proven fact. Therefore, it is not gambling. Not much more than the risk you take when you buy a CD or bond, that the bank or company who issued it will go out of business.

Companies whose stock appreciates well can then issue more stock, which then helps them to better implement their plans for providing the public with new products and services, without having to go into debt for all the funds needed.

The whole capitalist system, which has made the world we live in, a remarkably comfortable place for a lot of people, is built on the concept of stock companies. If people didn't invest in these stocks, the system wouldn't work.

Buying CFDs, as far as I can see, has nothing to do with investing in stocks. In the old days, when people gambled on the "numbers," the winning numbers were determined by certain races at certain tracks, the results of which were published in the daily papers, so that everyone could see whether their numbers won. Betting on the numbers had nothing to do with betting on horses. The only reason the race results were involved was because there were numbers there that everyone could check on, and there was a legitimate unpredictability factor and validity factor in the results. CFDs seem similar to that. Stock prices are published daily, and can't ordinarily be fixed, so they are analagous to the horse results in the numbers game.

The main difference is that numbers betting was illegal and controlled by organized crime syndicates. CFDs are legal and controlled by brokerages.

Since people don't buy stocks when they buy CFDs, they are neither investing or, in any way, serving as a part of the system of buying and selling stocks that makes the capitalist system work.

So, the difference between stocks and CFDs is fundamental. Even if you own a stock for a very short time, you are operating as a link in the chain that holds up the economy. With a CFD, all you own if a chit that shows what your bet is.

[LivinLOS]

Nothing to do with helping an economy or not (and the mountain of derivities may wll bring the whole house of cards down.. Its only been 30+ years since the gold window was closed and the global financil market have become leveraged at a near logarythmic rate)..

Using CFD's has the same outcome as using stock but with higher gearing.. Nothing more or less gambling about it than owning or selling a stock.. You think that stock will rise you buy it.. You think that stocks CFD will rise you buy it.. Both same outcomes or failures but one with far higher leverage.

I see nothing that creates a more gambled approach to the situation.

[JayBee]

Originally Posted by LivinLOS

Nothing to do with helping an economy or not (and the mountain of derivities may wll bring the whole house of cards down.. Its only been 30+ years since the gold window was closed and the global financil market have become leveraged at a near logarythmic rate)..

Using CFD's has the same outcome as using stock but with higher gearing.. Nothing more or less gambling about it than owning or selling a stock.. You think that stock will rise you buy it.. You think that stocks CFD will rise you buy it.. Both same outcomes or failures but one with far higher leverage.

I see nothing that creates a more gambled approach to the situation.

Here's the difference. If everyone sold their stocks next week, and "invested" the money in CFDs, the economies of the world would come to a crashing halt. Countless people would lose all their savings, and many institutions would go broke. The people who bought CFDs would lose everything, and a few smart rich guys like Warren Buffet would own the world.

The difference is so fundamental and obvious, I am amazed that you don't see it.

[LivinLOS]

Sure if the entire world sold its stocks.. But surely to do that someone would need to buy those stocks.. And if the entire world sold then who too ??

For every transaction there has to be 2 sides.. Anything else you state is purely impossible.. EVERYONE cant sell !!

And I still fail to see how one is gambling more or less than the other.