Seeking advice from CFD pros

[bikhod]

Hi

I am an ETF speculator and I have been using ETrade US for many years.

I want to have a go at speculating on indices directly. I looked into spread betting and even tried it. But, I am not happy with brokers creating their own quotes. I want the market price. So, I am considering CFD's instead.

Is the following correct:
- CFD's commissons are quite high. How high is high?
- CFD's give leveraged exposure to the cash market and not futures markets. I.e. I can still continue doing my normal analysis of the cash markets and avoid futures altogether
- CFD's should only be considered for no more 10 weeks per position
- CFD's are very liquid (i.e. rapid entry/exit) and very tight spreads

Anything else? Are there any high quality sites/books for CFDs?

Thanks in advance

 

[Captain Haddock]

Hi,

I think I understand your question as wanting to trade indicies but not spreadbet?
CFD's are generally used for positions in equities not index trades. Some companies will offer index cfd's but the prices will be their own mix of futures and cash. No real difference to the index quotes you get from spreadbetting companies. Use futures if you want to speculate on index moves directly at the exchange.

As for equity CFD's yes the com's are rather high between 5-15bps per trade depending on the deal you have negotiated.
CFD's have a financing cost associated with them. When holding a position on margin you will be charged per day for borrowing that money, therefore they are not a suitable vehicle for long term investment.

 

[globaltrader]

Bikhod,

- CFD's commissions are quite high. How high is high?
Captain Haddock is broadly correct with his range, although some providers layer in an advisory service on top of this and charge accordingly. Most houses offer volume related pricing, down from their stated price.

- CFD's give leveraged exposure to the cash market and not futures markets. I.e. I can still continue doing my normal analysis of the cash markets and avoid futures altogether
Correct. The standard CFD is a derivative of a cash equity and should exactly mirror the price of the underlying equity.

- CFD's should only be considered for no more 10 weeks per position
CFDs don’t attract stamp duty and so in the short term have lower costs attached. In the medium term, other things being equal, the key variable that determine the breakeven point between holding a CFD versus the underlying share is the financing charge. The higher the financing charge the shorter the period of time in which it makes more sense to use the CFD. Financing charges are quoted as LIBOR (for the UK) plus ‘x’ percent. To calculate your breakeven point, you need to know what ‘x’ is for you as well as well as the theoretical rate of return that you could get from a bank on the capital not tied up if you were to buy the underlying shares. 10 weeks is a good benchmark, but you have some control of this by driving down your ‘x’.

- CFD's are very liquid (i.e. rapid entry/exit) and very tight spreads
CFDs should be as liquid as the underlying market and have the exact spread of the market.

Hope this helps. Probably of more help is http://en.wikipedia.org/wiki/Contract_for_difference

 

[bikhod]

Thanks to both Captain Haddock and GlobalTrader for your replies.

Although I have been speculating ETFs for a very long time in the US, I have never considered Futures because I have never had the time to study them. Also, I do all of my Technical Analysis in MetaStock and I wouldn't know where to get historical prices from (I use Yahoo for ETFs).

Back to the main point: should I consider Futures over and above CFD's for index speculation? I never deal in individual stocks - just indices such as Singapore, Australia, S&P500, Brazil etc.

I know Interactive Brokers offer Futures and a lot more. Ultimately, I want access to tradable indices - leverage is not important to me.

Thanks

 

[globaltrader]

Bikhod,

If you want entry level access to trading futures, the spreadbet is the standard, although not the only, path. Spreadbetting houses take the future price and then wrap a spread around this (ie the commission is built into the market price). Some houses relate their prices closer than others to the underlying future price, ie there is a tradeoff between tight prices and market transparency....At the end of the day the Spreadbet is a bulk-breaking product, chopping up one future into smaller parts for the non-institutional traders and all spreads houses provide the main indices.

If you wish to carry on trading ETFs, more and more houses are now offering CFDs on ETFs.