CFD spread

paulcamb

Newbie
6 0
I am with IB at the mo but am thinking of trading CFD's.Can anyone tell me if the bid/offer is the same on CFD (nasdaq stocks)is the same as dealing on the actual shares.Also can anyone recommend a broker for a small account £5000 deposit.I am thinking of deal4free as I belive IB do not offer CFD's .Many thanks...
 

Trader333

Moderator
8,648 978
In view of the fact that CFD providers make their money by having a spread on the stock concerned (in theory at least), then there no way that they will be quoting the same bid and ask as is seen on the actual Nasdaq Exchange. As an example MSFT usually has a bid - ask spread of 1c or less where-as the narrowest I have seen this with a CFD provider is 5c.

For other Nasdaq stocks it can be huge depending upon liquidity.


Paul
 

paulcamb

Newbie
6 0
Thanks then there dosent seem to be much benefit in using CFD's over speadbetting.Do you know what the minimum account size required by Interactive Brokers for trading stocks on the Nasdaq is.I can do £5k and if I have to go to £10k.Ihave usually traded index futures but after attending a one day course with NAZ (most helpful) I think it wise to change.
 

chump

Senior member
2,212 274
Trader,
Looking at a trading style outside of daytrading have you any take on how the narrower spreads of direct access (complete with currence issues) compares to the tax free but wider spreads of SB ?

Cheers
Steve
 

Trader333

Moderator
8,648 978
paulcamb,

The minimum balance required for Pattern Day Trading with IB is $25K and to be honest I wouldnt trade with less than $30K in my account as it gives more room. This is because if you only had $25K in your account and your first trade was a loss then you lose your ability to day trade, ie your account has to be above $25K at any given time.

With regard to CFD v Spreadbetting, the only advantage I am aware of is that the CFD has to be based on actual stock price where-as using Spreadbetting you are trading against the SB company's quote and there has been much discsussion on whether this is manipulated or not.

chump,

If I was position trading I would use a SB company without hesitation. That said I dont see any currency issue using my direct access broker as my account is in GBP and not USD.


Paul
 

chump

Senior member
2,212 274
Thanks Paul,
Particularly the headsup on the currency issue. I see the other advantage of direct access being the breadth of issues you can select to trade from.
I'm still looking but so far the offering of issues which can be traded via SB as far as 2nd qtr out looks limited. Anyone know which SB has got the largest selection of issues that meet this criteria ?

Cheers
 

tradertim

Member
68 5
Trader333,

You say your direct access account is denominated in GBP, but in an earlier posting you mention trading in NASDAQ stocks. How does this work? Does your broker change your GBP into USD each & every time you deal? If so, aren`t the commission charges & currency buy/sell spreads a relatively high expense in relation to the sort of returns available from daytrading?
 

Trader333

Moderator
8,648 978
tradertim,

All that happens is that I gain a number of dollars from each trade and this is converted back to GBP at the end of the day at the then exchange rate. There are no exchange rate costs incurred for doing this. The commission costs are very low and many people use the same broker (IB) for this reason.


Paul
 

tradertim

Member
68 5
Trader333,

Thanks for your reply.

When you say there are no currency conversion costs, surely IB have to pass on the spread between buying & selling currency on the spot market? Are you saying these are rolled into the fixed commissions?

Do you have to arrange for currency conversion in advance of trading each day, or can it be done instantaneously & automatically at the same time that you place the trade? If your funds are not held in USD, don`t you fall foul of the SEC pattern day trading rules - i.e. requiring a minimum $25k in your account?
 

Trader333

Moderator
8,648 978
tradertim,

There are no currency costs of any kind that I am aware of and it is not costed into the spread as this is not a spreadbetting company it is a direct access broker. I dont have to make any special arrangements to trade as I have what is called a Universal Account that allows me to trade any instrument in any currency supported by the broker.

My account holds enough GBP to be the equivalent of $30K so I do not fall foul of PDT status. But if the GBP fell in value against the USD by a large amount then I would need to make sure I had enough GBP in my account for the PDT equivalent in USD.

I know you keep thinking that there must be costs for conversion somewhere but if so they are pennies and I have never noticed them.


Paul
 

paulcamb

Newbie
6 0
Many thanks trader for your help.I have decided to raise the cash and go with IB and trade Nasdaq stocks so that i can get the best bid/offer.Hope the exchange rate stays in our favour for a while.The problemwith trading is it's a money makes money game and as a day trader i need the tightest spreads so i feel this is the only way to go.
thanks again

paulcamb
 

sidinuk

Established member
624 5
When you say there are no currency conversion costs, surely IB have to pass on the spread between buying & selling currency on the spot market? Are you saying these are rolled into the fixed commissions?

Say you open an account and deposit £20,000, you then trade US stocks/futures. As you don't have any USD's for margin, IB will 'lend' you them using your £20,000 as security, for this they will charge you interest. After a while, say you have made $10,000 in profits, you now have £20,000 and $10,000 in your IB account. IB no longer need to lend you the $ margin as you now have it.

If you want to withdraw the $'s then you will need to convert them to £'s for which IB have a market with a small spread (at the moment it is 0.5384-0.5394).

Does that make sense?
 

tradertim

Member
68 5
Sidinuk,

Yes thanks, that makes sense, although your advice seems to differ somewhat from Trader333`s.

He didn`t mention any margin financing costs for USD trades if you maintain your security in GBP. If you converted your security to USD and didn`t need any margin for your trades, presumably such financing costs would be avoided, albeit at the risk of adverse currency movements?

He also didn`t mention any currency spreads. The spread that you quote on currency conversion amounts to about 0.18%. On a stock priced at $40/share this equates to $0.072/share. Add in dealing commissions at $0.01/share (<= 500 share position size) and currency commissions at about $0.007/share, then I calculate it`d cost about $0.089/share on each side of the trade assuming that you wished to convert currency for each & every trade. If this is correct, then it would seem the spreads on US stocks used by Deal4Free ($0.05/share + slippage) are competitive!?

The currency issue (& CGT) has always deterred me from going down the Direct Access route. Can you convince me that Direct Access is so much better than Spreadbetting/CFDs that it`s worth either adverse currency fluctuations or the extra cost of frequently converting GBP to USD and back again?
 

sidinuk

Established member
624 5
tradertim,

To be honest I don't trade shares only futures and this is how IB have handled my account and I only assume it is similar for shares. It's entirely possible that i am completely wrong!

You don't need to convert the funds every time you trade as IB will take your sterling deposit as security against the USD margin that they will lend you - therefore there are no conversion costs just minor financing costs if you don't have any USD on deposit with them.

You certainly wouldn't want to constantly convert GBP to USD and vice versa. Personally I only do it when I want to withdraw profits which have accrued in USD.

You will have to accept some currency risks, though, at the end of the day (winner - most irritating phrase 2004) you are trading in USD not GBP.
 

tradertim

Member
68 5
Sidinuk,

I`ve contacted IB and they confirm what you said - i.e. that by using IB`s Ideal account your main capital is not exposed to any currency risk, and the only indirect expenses are margin interest and currency fluctuation/conversion costs on the amounts which you might borrow for trading (whether it be futures or stocks).

p.s. I agree that (Michael) Winner`s phrase "don`t worry it`s only an advert dear" is one of the most irritating of 2004!
 
 
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