Newbie question about CFDs

[akhan789]

Hi

I've never used CFD's before i've been trying to figure out how to calculate the price of one 'Contract' for example:

Company X (UK) share price = 100.0 pence

How much would 1 'Contract' cost me?

to me it seems like a pretty simple question but not been able to find an answer for it anywhere unless it requires more information (about my stockbroker/about the stock)

I used a few demo CFD simulators and i just can't for the life of me figure out how they work out how much contracts are worth

Thanks for any help guys

 

[yuapanda]

Each contract will depend on where you trade as far as I know. I'm in Aus, so I can only speak for Australia.

In Aus CFDs are exchange traded, so the ASX (australian stock exchange) publishes a contract price list. e.g the ASX200 contract is $305.

Other costs like brokerage, OIC costs, margins etc are broker-specific. Stuff like margins have a minimum set by the ASX, but sometimes brokers will have higher minimums.

If you've got any experience, think of CFDs as relativly iliiquid, non-expiring futures.

 

[akhan789]

I have no experience unfortunately but i really wanted to get into CFDs, Barclays stock brokers say the calculation for it is Share price mulitiplied by Deposit Percentage (10% in barclays case) multiplied by Share quantity but i don't really understand this because when you trade in contracts you're not really trading in quantities of a share are you?

any ideas?

 

[mel_pub]

It is a contract not a security, and since it is issued at market price it is completely neutral and it 's price is zero (let's forget interest rates).

You just post cash collateral, and both paties are enaged to pay the other the difference between the (market) price of the underlying at the close of the contract and the (market) price of the underlying at the opening of the contract . The notional of the contract would usually be in shares

when you "open" a contract on 10 shares it means that the underlying of the contract is ten shares
(it's the same to say that you open 10 contracts on that stock)

Barclays stock brokers calculation is the collateral that you need to post which they might refer to as "what it costs you" but it is misleading (the contract itself is worth 0)

 

[akhan789]

aah, so if i were to buy like 100 'cfds' in something it means that the 100 'cfds' is the 10% deposit so the actual share quantity for that trade would be 10 times the 100 'cfds'? so 1000 shares or does margin mean that the amount of shares you end up 'contracting' for is higher/lower depending on the margin for that stock quoted by the broker? (if any of that makes sense :\)

 

[mel_pub]

No you don't want to buy cfds, you want to buy shares.

Look at it this way : you want to buy 100 shares at £100. it's a total notional amount of £10.000 (your exposure to the market). Your profit or loss would be those of someone holding a 100 share of XYZ, or "£10.000 worth of stock of XYZ "

Except with CFDs you don't buy anything, you sign a contract with your broker to pay/receive the difference

If you own the shares and the stock drops to £90 you loose £10 x 100 shares =£1.000 (that's your "mark to market" loss until you actualy sell the shares).
These are your shares, nobody gives a s**t of what you do with them or if they go to zero. You're on your own.

But here with a CFD you don't own shares, you signed a contract ten days ago. So now you want to stop the mess, you "close" the contract. You owe the broker £1.000

And to be sure that you'll pay what you owe, the broker required you to make a deposit of cash. In this exemple if the margin was 10% you would have had to post £1.000 of margin.

Another way to see it is that if you have £1.000 in cash in your accont, the broker will allow you to enter a contract worth of £10.000 (=allow you to buy £10,000 worth of stock)

You can buy anything from 1 share (£100) to 100 shares (£10.000)

If you buy 50 shares it is worth £5.000. You'll have to "lock" 10% of this (£500) as margin (the broker wants you to pay your potential losses). You can then buy £1000 worth of a stock that has a margin of 50% (£500 cash serves to guarantee your £1.000 exposure in that other stock)

 

[akhan789]

nice, that's clarified a lot for me thanks for your help

 

[yuapanda]

And thus you can take advantage of gearing. If you're confident enough that a stock is going up or down, then why not leverage yourself? Make sure you stop-loss everything of course =)

As a side issue, using CFDs allows you to short stuff which you might normally be able to do. E.g. in Aus there are rules in place before retail investors can short stocks or whatnot, but with a CFD I can do it easily as a matter of course.