CFD Trading: ASIC sets new rules for CFDs

Posted on August 12th, 2011 admin No Comments

Australia’s securities watchdog is calling for greater disclosure of the extreme risks of an investment product marketed at Mum and Dad investors.

Contracts for difference (CFD) allow the holder to profit significantly from a movement in the market price of an underlying asset, such as a share or commodity, without having to invest a lot of money.

The advantage of trading CFDs  is that it offers investors a stake in a larger number of shares and therefore the profit is far higher than if they just bought the actual shares.

But the Australian Securities and Investment Commission (ASIC) is concerned that many investors do not realise that behind the promise of infinite returns lurks the danger of infinite losses.

ASIC released new disclosure benchmarks for CFDs on Friday which call for financial institutions to follow strict guidelines to ensure potential investors understand the risks and benefits of improved investor awareness.

ASIC chairman Greg Medcraft says potential CFD investors need to be aware of the dangers involved with the extremely risky financial product.

“Most investors don’t understand that complexity and they don’t get independent financial advice,” he said in a statement.

“That means we need CFD providers to do a much better job of spelling out to investors the risks as well as the rewards of these complex products.”

ASIC also voiced concerns that Mum and Dad investors were exposing themselves to dangerous amounts of debt by borrowing money to open trading accounts for CFDs.

“We are concerned that using a large amount of borrowed funds to open a trading account creates a situation of double leverage that may expose investors to the risks of increased losses,” ASIC said in a report.

The securities watchdog suggested a limit should be set on the amount of funds accepted from personal credit cards.

Just as CFD holders can cash in if the share price of the company rises, they are also liable for any losses.

The downside could be devastating if the company takes a dive on the stockmarket, leaving the investor liable to pay a bigger loss than if they hadn’t borrowed money to invest.

With almost $100 billion wiped off the face of the Australian stockmarket in the past fortnight due to spiralling fears of European and US debt crises, unwitting CFD holders may have been caught up in the carnage.

There are currently around 39,000 active CFD investors in Australia and the CFD market has grown more than fourfold in the past five years to last year, according to a report published in 2010.

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CFDs or Margin Loans

Posted on May 23rd, 2011 admin No Comments

In 2003 traders and investors in Australia were given  CFDs. Since their introduction the industry has changed, CFDs being a simple form of margin lending have grown to be the fastest growing derivative product in the country, outstripping the growth experienced in the warrants market in the course of the mid 1990’s.

No longer does a retail investor have to to apply for a bank loan or deal with expensive full service brokers. CFDs have revolutionized the financial services industry, retail investors can now open a Contract for difference account on-line in minutes and be up and executing all of their orders in real-time on-line.

Unlike margin lending CFDs are usually traded over the web with the investors portfolio being marked to market in real-time right through the trading day, this is substantially different to the end of day portfolio revaluations utilized by margin lenders. Real time portfolio margining ensures that traders can properly precisely manage risk right through the trading day rather than having to wait for statements to be generated at the end of the trading day.

Similar to equities purchased having a margin loan CFDs also offer the holder the capability to receive a dividend, however in most circumstances franking credits aren’t passed on to the holder of a CFD unlike that of a margin loan.

The main reason franking credits are usually not passed on when holding a CFD is because the owner of a CFD holds an over-the-counter derivative contract and not the real share.

Not owning the physical share when holding a CFD position also means that the owner of the Contract for difference is not entitled to voting rights in the listed company over which the CFD is based.

Numerous CFD traders only hold their positions open for a brief time frame and aren’t interested in voting rights or franking credits but instead are interested in making a profit from the short term price movements of the Contract for difference.

One of the most significant advantages of CFDs is that traders can always sell them as easily as they can purchase them, this means is that going long is just as simple as going short allowing traders to gain in falling markets. With conventional margin lending short selling is difficult and near impossible.

CFDs are reasonably cheap when compared to margin lending, typical brokers offering margin lending will charge 0.50 percent whereas a normal CFD provider will charge 0.10 percent. One thing to be wary of are the rates of interest charged by margin lenders and Contract for difference companies. It is vital to note that margin lenders will charge interest only on the sum borrowed whereas CFD providers will charge interest on the total notional value of the position, however, Contract for difference financing rates are typically lower.

Financing rates are essential to consider when comparing both products, however, this is less significant for Contract for difference traders that only keep open their positions for a short period of time.

Generally CFDs offer traders extra leverage than normal margin loans allowing traders to obtain a superior return on their investment. You should also be conscious that higher leverage can also lead to an increase in risk, this is ordinary with leveraged products. The leverage offered for CFD trading is often as much as 100 times whereas margin lenders will commonly only offer roughly 10 times leverage or less.

The leverage obtainable will vary between each CFD broker and margin lender. Leverage is often determined on a stock by stock basis taking into account the market capitalization of the equity and liquidity.

As CFDs are an over-the-counter derivative product it is important to note that you do not own the underlying share or instrument over which the CFD is based, this also means that you can’t transfer your position to a different Contract for difference company or stock broker, you can only deal with the Contract for difference provider that you opened up the position with. If you buy shares on a margin loan the shares are held in your name which means you are able to move them without restraint from one stock broker to another.

CFDs suit short to medium term active traders seeking to make the most of market movements in both directions, however, margin lending is much better suited to people who are looking long-term investment options and want to make the most of the income tax benefits franking credits offer, in addition to voting rights.

It’s essential to keep in mind that both products are leveraged, you need to make certain that you adopt a suitable money management plan and not utilize the leverage offered to its full capacity.

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CFD or Contract for Difference

Posted on May 18th, 2011 admin No Comments

CFD Trading Strategies

  • Short term trading – the aptitude to deal on a margin basis, using no stamp duty in making payments make CFDs more attractive and lucrative for the investors anticipating to take advantage from short term price action.
  • Pairs trading – where an investor undertakes a extensive CFD in a company that they have confidence in is underestimated despite the fact that they might go short on a different further exclusive share in the equivalent sector or index itself.
  • Hedging – investors might make use of CFDs to hedge in contrast to the price falls in prevailing shareholdings. Investors can take out a small CFD in the shares moderately than selling the authentic shareholding to buy them back later, besides this time and again ascertains to be less expensive. If the share price falls, then investor would lose money on the shareholding but make money on the CFD. In case the share price goes up, at that point even though the investor would lose money on the CFD, the shareholding would have been greater than before in value.
  • Tax-efficient trading – investors who have a current holding in a company can sell CFDs counter to this, sanctioning them to control the time at which they develop capital gains or losses, particularly advantageous and worthwhile nearby the expiration of the financial year.

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Discipline in Trading CFDs

Posted on May 16th, 2011 admin No Comments

Independent Investor has asked traders looking to improve their consistency to exercise discipline in deciding how to trade, to maximise profits on rising positions and cut losses early to avoid capital decay.

With substantial leverage built in to the DNA of a CFD transaction, the need to allow profits to run is ever important, as a means of offsetting the more significant losses from negative positions to deliver an aggregate profit. Likewise, traders need to be especially proactive in cutting losses, to minimise the decay of trading profits and capital.

It is discipline in trading to this strategy that provides traders with a better chance of succeeding with CFDs, taking into account the significant impact leverage can have on increasing the risk profile.

Discipline was the cornerstone of a successful CFD trading strategy, and one of the most critical facets of a consistent, profitable trading approach.

With CFD trading, you get high risk, high return investment. With margin requirements often around 10%, the leverage built in to every CFD transaction is massive, and it can bring significant returns over a short period of time when traded successfully. That said, high leverage also works heavily against you when the markets turn, and so it pays to keep a handle on your losses while allowing your profits to run if you want to succeed as a CFD trader.

At Independent Investor, we’re urging traders to adhere rigidly to the doctrine of cutting losses and running on profits, and to have the discipline to see the strategy through over time. This is the key to succeeding as a CFD trader. While some positions will always win and some will always lose, only a disciplined approach to managing your trading account will yield aggregate positive results long-term, by offsetting minimal losses with maximised profits.

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CFD Trading: Important Things to Know

Posted on May 11th, 2011 admin No Comments

Before you start trading Contracts for difference it is vital to take a few hints from the experts to ensure that you do not make many of the expensive mistakes that amateur traders make.

Below are three trading pointers that will assist you in your CFD trading success.

1. Manage your Positions, time and again new traders spend a significant amount of time finding, planning and executing new positions, however they regularly make the error of exiting these trades with much less thought. This is unfortunate as it’s the exit that will determine whether a trade has been profitable or not.

It’s human nature to take profits hastily while the concern of incurring a loss will see the same trader leaving poorly performing positions open with the optimism that prices will move in the right direction and reduce losses or even turn them into profitable trades.

Many new traders forget about the old proverb “Let your profits run and cut your losses short”. As the proverb states if you have a profitable position, make sure you allow that trade to realize its full potential, as opposed to closing it out at the very first sign of a small profit. On the other hand, in the event you hold a position that is moving against you, it is best to move swiftly to get out of that position, before the loss becomes too great.

If you’re managing your trades correctly, your average winning trade should be much larger than your average losing trade. After you have the discipline to trade in using this method, you should be able to attain overall profitability even if only half of your trades are winners. Many traders make the error of not closing poorly performing positions quickly enough. One tool that makes this a lot easier is the stop-loss order.

Once you have identified a price level that corresponds with the amount of risk that you’re willing to take on a specific trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human element from the exit, reducing the chance that the emotion of hope will interfere with rational decision making.

It’s essential to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss is going to be activated if the price trades at or below the nominated stop level. Every so often, this can lead to trades being executed a price that is less favourable than the nominated stop-loss price. This is called slippage.

2. Understand the instrument you’re trading

Being over-the-counter products, there are various differences in the contract specifications of CFDs. If you are thinking of buying and selling these products, it is imperative to know what these specifications are.

You must also become familiar with the influence that currency fluctuations can have on your holdings. If the base currency of the CFD rises against the base currency of your account your earnings could be eroded by any foreign exchange fluctuation or your losses could be made worse.

Most CFD traders buy and sell CFDs based on shares listed in their own country. The simple reason for this is that traders are more at ease trading CFDs that they’re familiar with. Most traders also enjoy the convenience of trading their home market as it isn’t practical to sit up for half the night to trade a CFD over a share listed on an exchange in another part of the world?

In many circumstances it is much better to stick to Contracts for Difference quoted on equities listed on exchanges that you are familiar with as opposed to buying and selling CFDs based on stocks listed on markets you don’t fully understand.

3. Use the right order types

You should always treat trading as a serious business. As such, you ought to take the time to ensure that you thoroughly understand the tools of your business. Many Contract for Difference traders miss chances or have been closed out of trades at the wrong time simply because they placed the incorrect type of order.

At the very least, it is advisable to become familiar with the following order types:

Market order: This kind of order is utilized to execute a trade at the current market price.

Stop-order: This order type is used to exit a trade at a specific price. Stop-orders are located at a level that is worse than prices presently available in the market. On a long position, the stop-loss order to sell would be located below the present market price. Conversely, on a short position, the stop-loss order to buy would be located at a level above present market prices.

Limit order: A limit order is used to exit a trade. Limit orders are placed at a level that is better than the present market price. When seeking to lock-in gains on an open long position, a limit order to sell would be located at a level greater than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be positioned at a level below current market prices.

You must always remember that as Contracts for Difference are leveraged and that buying and selling them might be risky. Though if used correctly Contracts for Difference will become a valuable tool in your trading arsenal.

 

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CFD Trading Online

Posted on May 9th, 2011 admin No Comments

CFD trading has grown to be fashionable in recent times due to the profits attainable with a comparatively small outlay. CFDs allow traders to gain exposure to shares, currencies and commodities with ease via the CFD provider.

Each CFD provider employs a different trading platform, some are more complicated than others with the primary differences being the order varieties offered and charting. Most CFD providers will permit you to start with a comparatively little capital expenditure, this can be as little as $2,000, naturally starting using a less significant amount often means that you’ll want to carefully monitor your positions as a little adverse price movement could result in a margin call or even just your position being closed.

Even though there are certainly hazards involved in CFD trading there are also benefits, certainly one of the principle benefits of CFDs is their simplicity and ease of use, and this combined with the power of gearing makes CFDs a perfect tool for short to medium term traders.

Traders also can use CFDs for hedging their equity portfolio, which means they are able to capitalize on small price moves without having to purchase or sell their securities. The majority of CFD traders also have security trading accounts and most of the times have big stock portfolios.

Naturally trading CFDs does have dangers, however if managed with a proper risk management strategy and buying and selling plan can be minimized. Naturally all CFD strategies should incorporate a strong risk management strategy.

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Discover Who Is the Best CFD Broker

Posted on May 4th, 2011 admin No Comments

There are numerous respectable CFD brokers in Australia, their constant marketing and promotions make it difficult to pick which one is best, some have advantages over the others but most of the time it is their extravagant marketing and advertising that makes you pick your CFD broker.

When you sweep away all the smoke and mirrors and consider each of the best CFD brokers on a handful of key metrics you will soon find out which CFD broker genuinely fits your trading requirements.

There are some core key metrics that you need to evaluate your CFD broker on, these are:

1. DMA or Market Made

2. Web based or Download able trading platform

3. Product Range

DMA or Market Made It’s essential to make sure that you realize the differences between DMA and Market Made CFDs and the pro’s and con’s of each. DMA CFDs present some core advantages in that they allow you to trade in the opening and closing phases of the market in addition to allowing you to participate in the market depth. DMA CFDs are popular with scalpers and day traders but are not so common with traders needing exposure to indices or currencies and wanting to place guaranteed stop loss orders, this really is where Market Made CFDs have noteworthy advantages over their DMA cousins.

Web Based or Download able trading platform It can be quite perplexing when deciding on a CFD brokers trading platform as each platform has their benefits and drawbacks. It’s imperative to consider where you will be trading from as this will decide whether you utilize a web based or download able trading platform.

If you intend to trade from work it might be better to choose a web based trading platform for the simple reason that web based trading platforms do not require a download, which means they cannot be blocked by the firewall in an office, however web based trading platforms have some draw backs in that they have a tendency to lack much of the sophisticated charting functionality of download able trading platforms.

Download able platforms are more appropriate for home use as they offer considerably more sophisticated charts and order types as well as added features such as back testing and customizable multi monitor layouts. Professional day-traders and scalpers often choose download able platforms whilst casual traders are inclined to choose web based trading platforms.

Product Range, It is important that when selecting the best CFD broker for your requirements you ought to assess the products that they provide to ensure they can provide a range of CFDs that suit your trading plan. Some CFD brokers only offer CFDs on Australian Shares on the other hand others offer CFDs over stocks, indices and forex. If your strategy covers all of these products you must make certain that you select a provider that does not restrict you to Australian CFD only.

Of course when picking the best CFD broker for your trading requirements you’ll need to analyze all the metrics above and make your determination based on whether the CFD broker can give you what you require to implement your trading strategy. It’s also highly recommended to download a number of demo trading platforms available in the market, this may help you to better become familiar with whether the trading platform is appropriate for your requirements and trading approach.

Source: IC Markets

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What is CFD?

Posted on May 2nd, 2011 admin No Comments

A CFD or contract for difference is an agreement to exchange the difference in value of a financial instrument between the time at which it is opened and the time at which it is closed. The amount you gain or lose is designated by the difference in the price you bought at and the price you sell at multiplied by how many contracts you hold .

How does it work?

For every financial instrument the CFD provider will quote you two prices, the bid and the offer price. If you think the value of a particular financial instrument looks set to rise then you would buy at the higher (offer) price and sell at the lower (bid) price.

Put simply, you would ‘sell’ (go short) if you think the share price of Barclays likely to fall or ‘buy’ (go long) if you think it more likely to rise. Whether the market moves with you or against you then the degree to which you are right (or wrong) will determine your profit or loss.

What are the benefits?

Increased leverage, with CFDs you trade on margin, which enables you to take advantage of leverage. By paying a small deposit you can take a much larger position than you would if you were trading the actual instrument in the market. Because CFDs can mean large profits as well as losses it’s important you take a sensible attitude to risk.

Access to a wide range of markets, from indices, to shares, to commodity trading, sophisticated online trading platforms give one point of access to literally thousands of markets around the world.

Direct Market Access, with CFD trading it is possible to benefit from Direct Market Access which means any contracts you open will go directly to the stock exchange and will be at the underlying market price.

Considerations when choosing a CFD provider

Find a CFD provider who provides educational resources that will help both the beginner and the more experienced trader alike. These usually take the form of educational courses and online learning seminars.

Also, it’s important to find a trading platform that has all the features you’ll need to make a long-term success of trading CFDs.

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Consider CFD Trading Advice

Posted on April 27th, 2011 admin No Comments

Trading CFDs is a very new concept to a large amount of traders and investors in Australia, this is certainly understandable given the mechanics of CFDs are very different to traditional equity buying and selling.

Having an advisor or trading guide who can explain the idea of CFDs and help you to spot trading possibilities is often a relatively safe way for new CFD traders to gain exposure to financial markets.

A number of CFD companies are able to give you basic CFD trading advice and tutoring however a lot of them won’t offer you CFD trading advice.

There are however some CFD brokers who are able to give you advice and trading recommendations, it is these CFD providers that usually also specialize in other areas of money management.

Trading with a CFD provider that doesn’t exclusively specialize in CFD trading is usually a very good idea for novice traders looking for some guidance in managing their trading portfolio and understanding the hazards and benefits CFDs.

Trading with a CFD broker that offers an in depth range of products and services has a number of advantages in that you’ll be assigned a personal account manager with whom you are able to communicate with daily and ask questions.

If you require other services such as being contacted in the event of a trading idea it’s also possible to elect this, however you will be charged a higher commission rate when utilizing this service. Frequently extra benefits like being able to take part in extremely sought after placements and IPO’s will also be provided.

In a lot of cases receiving CFD trading advice will cost more than buying and selling for yourself online, however the additional commission fees are somewhat insignificant when you think about the advantages and are a great deal cheaper than the loses that many newbie traders suffer when placing trades with out a well thought out trading plan or strategy.

Ahead of trading CFDs either on the web yourself or with a CFD broker who can provide you with CFD trading advice it’s crucial that you understand not only the benefits of CFD trading but also the hazards. Over and over again amateur CFD traders fail to realise that even though the leverage related to CFD trading can lead to profits it may also lead to large losses, this is why having an understanding of risk management is imperative.

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DMA CFDs Australia

Posted on April 25th, 2011 admin No Comments

Direct Market Access or DMA is the term frequently used to explain a variety of CFD that has become prevalent within the Australian market, these are known as DMA CFDs. With DMA CFDs your trade is passed immediately through to the underlying share market with no dealer or market maker involvement, this means that orders are filled at the real market price and in a timely way with no re-quotes. Trading DMA CFDs is much like trading shares via the internet.

DMA CFDs offer absolute order transparency. Traders are also able to participate in the market depth of the underlying equity over which the CFD is based by joining a bid or offer queue and also the open and closing auction phases of the market. DMA CFDs offer all of the benefits of buying and selling shares with the additional leverage that CFDs offer.

Trading DMA CFDs is very similar to trading shares, traders are able to hit the bid or offer or join the buy or sell queue. DMA CFD traders have major benefits over traders using market made CFDs in that they’ve got the potential to enter and exit trades at superior rates.

When trading CFDs you’ll be required to subscribe to exchange data, the price of data varies from exchange to exchange. Once subscribed you’ll have access to real time prices and market depth allowing you to view the amount of buyers and sellers at each different price level and participate in order queues allowing partial fills and better execution.

When buying and selling DMA CFDs traders have the ability to be price makers meaning that as soon as an order is placed it will be transmitted to the real market and can impact the price of the stock over which the CFD is based.

Buying and selling Contracts for difference using a Direct Market Access (DMA) model is best suited to frequent traders that trade on an intra day basis. Frequent traders will find that DMA CFDs will allow them to buy and sell freely without dealer involvement and obtain better prices when buying and selling. DMA CFDs are also suited to active day traders and scalpers who are seeking to profit from small price changes quickly.

Source: IC Markets

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