CFD's (Contract for difference).Story in DomPost last weekend Saturday 10 July

[krusty]

Did anyone read this story. The newspaper has dissappeared to the recyling plant (china?) before I could give it another read.
Were all trades a two way thing, with a buyer and a seller? Did you have to wait for someone to bet effectively against you? eg if I thought the kiwi was undervalued, would you place your guess in the system, then hope someone picks it up and bets against you? Or maybe some counterparties are the system/company behind it?
Fantastic idea. Not having to really sell or buy anything.
Bit hardcore for me, but interesting stuff.

[peat]

Krusty
I dont know the story you're referring to but the provider of the CFD's makes a market in most cases I think. If there is a quote you can sell/buy into it instantly.
I guess if they have no liquidity (I assume they want to hedge the trade) the spreads widen enormously or they may not quote so perhaps not a market maker in the true sense but for most CFD's you can do a trade instantly as they only create them for relatively liquid markets. Certainly there is no problem with liquidity in the forex markets.
The concept of a CFD (esp in relation to equities) does seem abstract and it is technically a derivative and not a security , but it is based firmly on a security and represents the same value (give or take a bit of provider fluctuation) including dividends splits etc. And it reduces trading costs a lot for pure speculators.

[Dr_Who]

Peat, I still struggle to understand CFD in relation to shares.

When you buy a stock in CFD and they dont buy the same amount on the market as their clients amount, then how do they hedge against any loses? Eg: If I bought SIP in CFD for 30 cents and the next day SIP announces a T/O offer of 55 cents, then the CFD broking firm is holding a lost?

[Jay]

Peat, I still struggle to understand CFD in relation to shares.

When you buy a stock in CFD and they dont buy the same amount on the market as their clients amount, then how do they hedge against any loses? Eg: If I bought SIP in CFD for 30 cents and the next day SIP announces a T/O offer of 55 cents, then the CFD broking firm is holding a lost?

Yes I would like to know also Dr
Or is it that the majority make losses and this is where they earn their money?

[peat]

Yes I would like to know also Dr
Or is it that the majority make losses and this is where they earn their money?

quite possibly that is the case but that said its hard to imagine their long term business model will thrive on failing customers. so it would be a very short term strategy based on finding new suckers continually , which may work of course if you have good salesman. What they say and what they do may well be different. there are various theories around whereby they evaluate the customer and decide which ones to hedge etc.... but to be honest , to me it doesnt matter whether they hedge my trades or not as long as they can pay out when necessary. As a customer I am not concerned with their profitibility only their solvency
And that is where using leverage is good because profits can be extracted and only sufficient funds retained in the account to continue trading because those are the funds that are at third party risk

[CJ]

My understanding is that while they are a market maker, they do hedge their exposure by buying the underlying shares. I can see how that would work in a slow market but if the market was rapid dropping (or rising) that would be difficult.

[Jay]

Good points peat.
Yes as long as they can payout "your account" funds who cares really

[Doyle]

I'm Looking at CFD trading, and have signed up with IG markets. I have to say their trading platform leaves alot to be desired and also no NZX share trading, which means if your interested in nzx you have to trade dual listeds and expose yourself to fx risk. Wondering if anyone uses CMC markets and has some feedback to give on them? Just learning at this stage and am discovering there are alot of hidden costs with IG markets which can quickly mount up and eat away at any gains. Just interested in some others thoughts?

[Abracadabra]

Hi Doyle, I have just started trading with IG Markets. Personally I prefer them to CMC Markets, I had a trial with CMC, didn't find their website as user friendly. I also didn't like the fact if you wanted a G.S.L. you had to phone them and place it rather than just doing it online. If I remember correctly they also charge for changes if you want to change the G.S.L. whereas IG Markets don't. I sound like an advert for IG Markets don't I? LOL. Don't mean to!! Certainly there are some costs which seem to mount up very quickly.
I am still experimenting with setting the stop losses etc. My biggest problem seems to be not allowing the CFD's to move enough. It's a fine balance between giving them room to move and losing a whole lot of money!

Good luck

[OldRider]

I have to admit I have little real knowlege of CFD's, most of my understanding simply being from
anecdotal comments I have heard, so it is interesting to read here and find that others are mostly the same.

I have the view they have no real connection with the sharemarket, it just provides the odds, and
trading in CFD's is very similar to betting on the TAB, overall no capital growth finds it's way
ino the market, there is no Santa Claus, the only sure winner is the service provider who sets the spreads,
with the winners gains being balanced by the losers losses.

Is my view simplistic and wrong ?

[Doyle]

I have to admit I have little real knowlege of CFD's, most of my understanding simply being from
anecdotal comments I have heard, so it is interesting to read here and find that others are mostly the same.

I have the view they have no real connection with the sharemarket, it just provides the odds, and
trading in CFD's is very similar to betting on the TAB, overall no capital growth finds it's way
ino the market, there is no Santa Claus, the only sure winner is the service provider who sets the spreads,
with the winners gains being balanced by the losers losses.

Is my view simplistic and wrong ?

No not quite it essentially is more like a TAB, accept the provider doesn't get to set the odds, the underlying market does. Which leaves a problem, obviously they make money from fees, but unless the majority of the clients lose money then they don't make money. My guess is that they use the CFD market to allow them to sell market hedging to other institutiobs.

It just doesn't seem possible to bass a sustainable bussiness on the basis that the majority of your clients lose money, when you can't set the ODDs. So am picking some immensely complicated derivatives are involved and their risk is onsold somehow.

[Doyle]

Hi Doyle, I have just started trading with IG Markets. Personally I prefer them to CMC Markets, I had a trial with CMC, didn't find their website as user friendly. I also didn't like the fact if you wanted a G.S.L. you had to phone them and place it rather than just doing it online. If I remember correctly they also charge for changes if you want to change the G.S.L. whereas IG Markets don't. I sound like an advert for IG Markets don't I? LOL. Don't mean to!! Certainly there are some costs which seem to mount up very quickly.
I am still experimenting with setting the stop losses etc. My biggest problem seems to be not allowing the CFD's to move enough. It's a fine balance between giving them room to move and losing a whole lot of money!

Good luck

Cheers, eah it is a hard game to make money in, plenty have tried and failed. Guess the universal secret is developing a system and sticking to it. If your system is good then over the long term you will make money. I'm only young myself with no family to support, so if after a few years i'm getting the hang of it I may quit my day job and trade full time (I'd love too anyway". The secret seems to be sticking to the system no matter what, I personally find that very hard but I am Larning to.

[Toulouse - Luzern]

As well as making the market - It seems to me they gain fees from the spreads on each trade eg USDJPY forex is a minimum 2 pip spread twice eg Buy Sell for longs (or Sell Buy) for shorts.

Some forex pairs have higher spreads eg 8 pip spreads x 2 so it seems to me they make good fees on every trade.

They also have interest and revaluation on overnight holdings and the ability to create the trading package one unit size and opportunities ....

[Dr_Who]

Hi Doyle, I have just started trading with IG Markets. Personally I prefer them to CMC Markets, I had a trial with CMC, didn't find their website as user friendly. I also didn't like the fact if you wanted a G.S.L. you had to phone them and place it rather than just doing it online. If I remember correctly they also charge for changes if you want to change the G.S.L. whereas IG Markets don't. I sound like an advert for IG Markets don't I? LOL. Don't mean to!! Certainly there are some costs which seem to mount up very quickly.
I am still experimenting with setting the stop losses etc. My biggest problem seems to be not allowing the CFD's to move enough. It's a fine balance between giving them room to move and losing a whole lot of money!

Good luck

What is G.S.L?

[peat]

What is G.S.L?
Dr
Its a guaranteed stop loss.