CFD's Explained?

mcharlton

Junior member
24 0
I have posted a couple of questions on here looking at trading regular shares through direct access and at least one person always mentions looking at CFD's instead due to lower trading costs...

So... I have absouletly no knowledge of how CFDs work and would appreciate any thoughts, knowledge etc.. that anyone could post to give me a background understanding of the costs involved, most popular way to 'try' to make money from them, and the downsides (if any)... or any further info that would be useful...

Thanks in advance to all that help..

Cheers.
 

Trader333

Moderator
8,655 981
I would be surprised if trading CFDs is cheaper than Direct Access although the initial funding requirements are much better if you wish to trade US Stocks.


Paul
 

anley

Senior member
2,730 229
Watch the 'no commission' brokers because nothing is for free these days.

Also take note that CFDs are actually very expensive products to trade at a commission rate of 0.20% or higher. Basically you're trading a leverage product but paying commission on the full nominal amount. This is why many CFD clients are working for their brokers without them realising it.
 

mcharlton

Junior member
24 0
Thanks for all replies...

Had look and dont like the idea of leverage at the moment...

seams a very easy way to go bust!!!

Cheers...
 

pkfryer

Active member
243 0
No.. CFDs are a really good instrument to use for trading, especially if you go for a commission free one, which there are a few.

CFDs allow you to have anything from 1% to 10% margin only, they follow the underlying stock very closely, infact, its hard to see a difference. You dont have to pay capital tax but you do have to pay interest on the loan amount. e.g. if you have bought shares worth 100K, the margin is 5K, but you'll have to pay interest per day on the loan. But it doesn't actually work out to be much. A lot lot less than commission.

They make there money on the interest charged (which is above the base rate obviously) and a very slightly bigger spread. They might employ underhanded tactics... and delay winning trades from being filled, I certainly get suspicious sometimes, but if you've got a decent system a small margin of error wont ruin you.

The spread isn't as good as a direct access acount, but then you are getting high leverage which means you can do more with it. Also, unlike direct access, you can day trade stocks with it without £25K in the account although the spreads aren't quite as tight, and you'd never be able to trade UK stocks intraday anyway. Direct access allows you a 50% - 25% margin and will charge you several layers of commission... the brokers commission and the markets commission.

I would say its a perfect instrument to use, several miles ahead of spreadbetting and with a lot of good points in comparison to Direct Access. You can also set up stops and limits but often its not as close to the price as you like on most occassions. Its more for short to medium term trading, days to weeks (or months at a push).. but not too long as the interest will start to mount up. Spreadbettings only up side is they aren't so draconian about you having to be experienced and they are tax free, but as far as most traders are concerned (the ones that lose) thats not a big thing on their minds.

Also... watch the high gearing stuff! It can be a fast track to profits if you have a good system and experience, if you dont... you will lose a lot of money. The good thing is, they dont want you to entirely blow your account as its hard work getting the money back from you, so they liquidise your holdings if you havent got the margin for the open position. That normally happens before you turn negative (mostly)... I speak from experience on that. So instead of losing your house, car, job and kids... you just blow your account and maybe have a tenner left out of the ten grand you stuck in there! Good as a learn experience, but a bit pricey.
 
 
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