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CFD Trading In Australia – Why Is It So Popular?

August 2, 2010 — 11:48 am

CFD stands for Contract for Difference, CFDs are a financial contract made between a buyer and seller to make good the profit or loss incurred between the CFD was purchased to when it was sold. CFDs are common in both Australia and also the UK, they are mostly offered over indices, stocks and forex.

In the early days in London where CFDs began they were referred to as SWAP contracts. It wasn’t until approximately 2001 that CFDs became accepted by retail investors. It was CMC Markets and IG Markets, two large spread betting businesses based in the UK that bought CFDs to the forefront in the retail investors arsenal. CFDs fast grew to be well-liked in the UK as they didn’t attract any stamp duty.

In 2002 both CMC Markets and IG Markets opened offices in Australia and began to actively promote CFDs to Australian traders, the popularity of CFDs peaked in 2007. As a result of their popularity amongst Australian traders and investors many foreign CFD providers saw the potential in Australia and opened up offices. There are over 13 CFD providers operating in Australia and an estimated 35,000 retail CFD traders.

In recent times CFDs have received much negative publicity as a result of traders incurring losses due to overexposing themselves to the market during volatility. This combined with the recent folding of CFD provider Sonray Capital Markets has led to increased scrutiny by the Australian financial Services Regulator ASIC relating to how CFD providers manage client money.

At present CFDs remain probably the most widespread financial product for retail traders in Australia, although unconfirmed it is estimated that CFD volumes account for around 35% of ASX exchange turnover. As CFDs are an over-the-counter product it is difficult to verify this figure.

CFDs in Australia are largely traded live on the internet through a selection of proprietary CFD trading platforms offered by the major companies. A lot of of these platforms were originally developed for forex CFD trading however due to the similarities between share CFDs and forex CFDs the platforms have be adapted to suit share CFD traders.

As Australia has the highest proportion of share ownership in the world on a per capita basis it isn’t surprising the majority of CFD traders have experience trading shares online. The historical growth of the Australian share market has made share and CFD trading a prevalent pass-time for Australians.

Before you run out and join the 35,000 CFD traders in Australia you must make sure that you are completely aware of the risks involved in CFD trading. Like all leveraged financial product Contracts for Difference offer substantial benefits however these don’t come without risk. You must ensure that prior to jumping into CFD trading you read the Product Disclosure Statement (PDS) obtainable from your CFD provider that outlines the negative aspects and benefits of buying and selling CFDs.

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Forex CFDs And Spreads

— 1:03 am

Lots of traders and investors new to CFDs repeatedly hear the word spread mentioned by their CFD provider and ask me what it means. In brief the spread is the difference between the bid and ask price of the CFD. Spreads exist across just about all exchange traded and over the counter (OTC) products however it isn’t a term frequently utilized by share traders but more frequently mentioned when discussing index and forex CFDs.

The spread of share CFDs are often the same as the spread of the underlying security over which the CFD is derived however when trading shares this is often referred to as the bid and ask price. Many CFD providers may widen the spread of share CFDs when there is a lack of liquidity in the underlying instrument on which the CFD is derived, others may factor their commission charge into the spread. When choosing a CFD broker it’s imperative that you ensure the spreads of the share CFDs offered mirror the spread in the underlying share. Often CFD brokers that widen the spread of CFDs over liquid shares along with charging a fee are earning added revenue by taking advantage of their client’s lack of knowledge of the price of the underlying instrument over which the CFD is quoted.

Spreads are often applied to Index CFDs. The spreads applied to index CFDs work very in a different way to the spreads applied to share CFDs for the reason that some CFD brokers offer CFDs over index futures contracts even when the exchange on which they’re traded is closed. Often the price of an index CFD is based on the fair value of the futures contract or cash price, CFD providers will take the price of the index and add a spread which is often wider than the spread in the underlying index futures contract. When the exchange on which the futures contract is quoted is closed CFD brokers will often widen the spread as they’re not capable of hedging their client orders. The spreads applied to index CFDs will vary according to the exchange and liquidity of the underlying futures contract.

The spreads applied to forex CFDs work in a similar manner to the spreads applied to index CFDs however as the forex market is the largest market in the world, there’s a vast quantity of liquidity and spreads are often very tight. It is very important to be aware that some CFD providers will take advantage of forex traders by quoting tight spreads for small trade volumes or during quiet market periods, but widen the spread during busy periods or when the trader becomes more active. It’s common for CFD providers to differentiate themselves from by quoting variable or fixed spreads, however both have their advantages and disadvantages.

When trading forex CFDs with fixed spreads traders don’t have to worry about being re-quoted or spreads widening over periods of high volume, they are also able to calculate their profit or loss accurately without being at the mercy of the CFD provider. Trading forex CFDs on fixed spreads can be advantageous over variable spreads especially in periods of volatility where providers offering variable spreads will show enormously wide spreads, however trading during times of low volume will cost more. Fixed spreads are often suited to forex scalpers or day traders who trade frequently during volatility.

Trading forex on variable spreads also offers benefits for the reason that traders are often able to enter the market during quite times at better prices, however all traders should beware that variable spreads are not always advantageous in that should the trader wish to exit the trade the CFD provider may show a wider spread than the spread shown when the trade was opened. Variable spreads are suited to longer term strategy traders who don’t trade during volatile periods.

In conclusion it’s vital that as a newbie trader you understand how CFD providers can use the spread to their benefit. As always it is important to ensure that you opt for a CFD provider that is able to offer you CFDs that will fit your trading strategy as the wrong choice might be an expensive learning experience.

Before you start trading Contracts for Difference you should understand how CFD spreads can impact your CFD trading profits, it is crucial that you take this into account prior to choosing a CFD provider.

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CFD Dealing And Recommendations About It

August 1, 2010 — 4:36 am

The abbreviation of CFD actually means Contracts For Differences. Therefore, in the event the agreement is actually approved by both the sides, it will be the peculiar dissimilarity which has to be paid by one of the participants to the other, determined by which the some stock in question has moved and its rate right in conclusion of the contract period. So the person who sells the product would have to pay the client in the event the stock has gone upward and then the customer pays the seller if it has shifted down. Nonetheless, this manner of stock trading is not indeed enabled in certain states due to its speculative nature.

CFD dealing or those that trade in CFDs in common appropriately know about the danger element in these deals. Because they are speculative matters which are entered into between two sides – a person who makes a purchase together with a seller and there occurs to be no physical possession of shares related, the probability for leverage and thus taking a gamble on a higher sum of shares simply by paying out a percentage of margin money assists it be an excellent trading tool.

CFD trading has its own risks a result of the leverage taken by either party, rapid and sharp movements in stock costs as a rule leads to a lot of losses. These kind of risks usually are not often thoroughly expaned to the peculiar market participant and it is usually just whenever somebody begins actively trading in which the individual learns how risky it in reality is and how quickly you may easily lose money taking a possibility on stock price movements.

This occurs because the costs of stocks are defined by some external elements which cannot be permanently predicted and not while in the regulation of any individual. They behave to market powers, wide spread factors and any sort of news which may be connected to either the industry or perhaps a definite stock and in some cases these are not known and will happen very instantly.

As a result, there is an element of gambling associated with CFD trading even in the case you might have quite good knowledge in relation to what exactly is happening in the market, you may still be caught on the incorrect foot.

That can be where the concept of hedging gains its importance also it is extremely advised that individuals which trade CFDs or wish to do CFD trading as permanent activity should learn about how they can hedge their losses via hedging instruments.

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Exchange Traded ASX CFDs In Australia

July 18, 2010 — 3:33 am

What is a Contract for difference?
A CFD (Contract for Difference) is an arrangement between a buyer and a seller to exchange the difference in value of a particular instrument between when the contract is opened and when it’s closed. The difference is set by reference to an underlying instrument which is usually a equity, index, currency or commodity and the period over which the CFD is held.

CFDs are geared instruments. This means that you are fully exposed to price actions of the underlying instrument without needing to pay the full price for that instrument. Leverage means that Contracts for difference offer the potential to generate a higher return from a smaller initial cost than investing directly in the underlying stock.

Leverage, however, usually entails more dangers than a direct investment in the underlying stock. It is critical to recognize that this effect may work against as well as for traders. Using leverage can lead to large losses as well as large gains.

Advantages of trading CFDs
CFDs have been used by professional traders for over twenty years and emerged initially as an over-the-counter (OTC) product. CFD related trading and hedging is one of the fastest developing areas in the Australian and European derivatives markets. This popularity has arisen as a result of the following main features:

Leverage
CFDs allow you to obtain full exposure to a share, commodity, Currency or index for a fraction of the price of buying the underlying. CFDs require only a small initial margin to secure a position.

The capability to go ‘short’
CFDs allow traders to take advantage of falls in prices. This means that investors can benefit whilst prices are going down, not just up. CFDs are thus an excellent trading and hedging instrument.

Ease
Non-expiry: The majority of CFDs do not have an expiry. They are perpetual in nature. For CFDs that do not expire, the only way to close a trade is to trade the opposite side of the position.

The CFD mirrors the price of the underlying: Unlike other varieties of derivatives (i.e. options and futures), cash flows such as carry costs and dividends are not mirrored in the cost of a CFD. Instead, cash flows are paid whilst the position is open, enabling CFD prices to follow the underlying instrument rather than trade at a discount or premium, as can be the case in other varieties of derivatives.

Advantages of ASX Listed CFDs
Market Independence
ASX is obliged in accordance with the Corporations Act to ensure that its markets are fair, orderly and transparent. ASX ensures a sound operational and front-line regulatory environment for its exchange-traded markets and clearing and settlement facilities, providing effective systems and infrastructure together with services intended to maintain and enhance the integrity, proficiency and effectiveness of its trading, clearing and settlement facilities. For the ASX Listed Contract for difference investor, this means being able to participate in the market with assurance.

As the principal market operator, ASX is independent of the parties with whom you are getting recommendations and dealing through enabling it to act fairly and impartially. This separation of accountability between broker and exchange also provides customers with selection as to whom they wish to execute their business through.

Having a central market also means there is one accepted contract specification for all ASX Listed CFDs, not a different product based on who you execute through. It’s a fundamentally superior CFD market.

Transparency
Transparency is a key ingredient in a well educated market. ASX reports on all ASX Listed CFDs transacted, open positions, bid, offers and their volumes. In fact, all the market information you are used to seeing from the ASX. This means a better informed market.

ASX Listed CFDs are traded in the same way as other ASX traded contracts:
1. All prices are formed in a completely transparent way in the ASX’s CFD central market order book. Each trader’s order is pooled in the ASX Listed CFD central market order book with those from other market members, including market makers, and becomes an integral part of the price discovery process.
2. All deals are executed on a strict price/time priority. Price/time priority means the first person to enter the best price is traded against first. This results in each person in the central market order book being dealt with equally and consistently, no matter how big or small a trader you are.
3. Notably, while prices are transparent, the individual trader remains nameless, which minimizes market impact costs (particularly those connected to other people identifying an individual’s trading patterns and trading in front of him/her).
4. Anyone can place into the market a better bid or offer, as is the case in all exchange based markets. No-one is forced to accept the price offered in the market. However, once an order is executed, you are fully committed to settle the trade. All prices in the market are firm in the volume indicated.
5. The ASX Listed CFD central market order book incorporates orders from market makers. Their activities help guarantee the ASX Listed CFD market has competitive prices and deep liquidity.

Risk Management
ASX Listed Contracts for difference operate in a centrally cleared marketplace. The Clearing House provides central counter party clearing for the ASX Listed CFD market. This involves the Clearing House managing risks to ensure that the interests of its Members and customers are protected and that the integrity of the marketplace is maintained.

Through a method known as novation, the Clearing House becomes the principal to all trades and liable to perform against all contracts to which it is a party and effectively ‘guarantees’ performance to other Clearing Participants. Novation and thus the clearing guarantee become effective on registration of the contract connecting a buyer and seller.

This exposure is then managed and the clearing guarantee established in a number of ways. First of all this is often accomplished by the collection of the various margins. The collection of these moneys protects against excessive price movements and prevents members from accumulating sizable unpaid losses that might possibly impact on the financial position of other market users. This is a main component that differentiates exchange-traded markets from over-the-counter (OTC) markets, where such a strict margining regime is not in place.

The ASX Listed CFD market also has access to the Clearing Guarantee Fund for use in the event of default of one or more Clearing Participants.

Investing in the ASX Listed CFD Market
When trading ASX Listed CFDs, your order is entered directly via a participant into the ASX Listed Contract for difference central market order book. This order book is accessible for the market to see. All orders are filled on a strict price/time priority. This means that the initial order with the best bid or offer price is always filled first. Transacting in the ASX Listed Contract for difference central market order book also ensures “customer instructions” are always given priority over a broker’s “house orders”.

In contrast, traders trading CFDs through an OTC broker, do not have their orders in the ASX Listed CFD central market order book. These orders are transacted with the OTC CFD counterparty (generally described as a Contract for difference Broker). The customer’s order is not protected by the ASX’s price/time precedence or customer order priority rules.

To find out more about ASX CFDs you ought to download this CFD ebook which explains ASX contracts for difference in detail as well as how they are margined, priced, cleared and how you can go about finding a broker that is able to offer you the world’s first exchange listed CFD contract.

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Managing Your CFD Trading Account

July 14, 2010 — 12:31 am

The very first question that novice traders usually ask is “Why bother?” Portfolio management is usually a complex subject and can take lots of time and energy. Surely it is much better to simply concentrate on trading and let the cash take care of itself?

In an ideal world of course that would be the case. But this isn’t a perfect world.

Portfolio management allows you to diversify your risk. Poor portfolio management would be to have all your account leveraged in three CFD trades, all long and all in one sector. Should all CFDs drop by just a few per cent, your trading account may very well be wiped out. A far better method of capital allocation would be to construct your portfolio in similar technique to banks. That is to “spread your risk”.

Some CFD traders would contend that portfolio management is not essential. Numerous CFD traders do not even use portfolio management, and they can go on to have lengthy and successful trading careers. However, it is sensible for most newbie traders to practice sensible money management. The discipline of portfolio management will help protect you and your CFD trading account from disaster.

One disadvantage of portfolio management is that it is probably going to need more capital. A $5,000 account will always find it hard to diversify and allocate capital in a diverse manner. The simple reason for this is because $5,000 isn’t enough to diversify.

Before you start you should always consider putting slightly more money into your CFD trading account, this will enable you to diversify your portfolio. This may sound unpalatable, but when you consider who else is looking after your capital for you (fund managers), you would be far better off managing it yourself.

Timeframes
It is hard to rely on one timeframe. Most people describe themselves as “15 minute chart” traders, others as “end of day”. In reality a mix of strategies is what’s going to normally work best.

Some people are much longer term CFD traders, in reality they are not really traders at all but simply investors. “Buy and hold” is the maxim utilized by most of these people (often referred to as “buy and hope” by shorter term CFD traders).

Two of the great long term investors in history have been WD Gann – who spoke of there being “more money in the long pull” and of course Warren Buffett – who advises anyone not to put money into a stock if they are worried about its price declining 50%.

This timeframe argument actually becomes an issue of trading style a lot more than anything. There can be trading styles as varied as scalping and weekly swing trading that on the same CFD will produce the difference between making 200 trades a day versus 12 trades a year.

The key thing about timeframes is that your optimal timeframe is a personal thing. What works for one individual may just be totally wrong for the next. No single timeframe is right or wrong. Just go with what works for you.

Risk diversification
When diversifying your risk think global. Do not confine your trades purely to one market. A lot of the largest share CFDs trade large daily volumes overseas (e.g. BHP is traded in the UK as BLT – Billiton).

This is an important thing to be aware of. The financial markets trade almost 24 hours a day. You should use this to your advantage.

Trade whilst you sleep, with orders protecting your capital and taking profits. If your analysis is correct you won’t need to worry about being awake, trades will run themselves.

Make end of day decisions on these trades, you will have plenty of time to analyse the picture, so use it. Do not be lazy. Do your groundwork.

Leverage
Leverage truly is a ‘double-edged sword’. Used wisely it may be the edge that gives you a massive return on limited funds. Used incorrectly and it can obliterate your trading account in minutes. Use it wisely. No good CFD provider wants you to lose. CFD providers offer leverage because they know skillful clients can benefit from it.

Always keep in mind Rule number 1- It’s essential to stay in the game. It is unrealistic to expect to be making millions after your first few weeks CFD trading it is more more likely to take 6 months to 2 years before you become a profitable CFD trader.

Remember it takes a good doctor a minimum of 5 years to qualify and they still have patients die on them. There is no reason why learning how to trade should be a 5 minute thing. It just won’t happen.

Don’t over leverage – make this your mantra. Don’t use leverage simply because it’s there (Your car has an air bag but you don’t want to use it on every journey, right?)

Used wisely you have a huge advantage with the leverage available to you, but be aware it is like a sharp knife, best used cautiously. The more skillful you become, the more you will learn how to use it and that’s what your evolution as a CFD trader is going to be all about.

Before you start using Contracts for difference in your trading strategy you should decide whether CFDs are the right financial product for you. If you are a novice trader you can get additional education on using CFDs from any CFD provider.

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