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diablo272

What is a CFD?

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In the UK where they originated (or where they were adopted early at least) they seem to be largely superseded by spread betting which has tax benefits over CFD's

 

leveraging for trading cfd's sound in many ways like the private capital trading firms (not brokers) in the US that offer 10x margin on small deposits.

I have a link to one if anybody cares.

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It should be pointed out that CFD's are not allowed to be traded by US residents (& citizens?), which is kind of odd given they rule trading in many other markets in the world now and replaced much of the need to trade options for leverage, so in part it's to protect the options market revenues in the US I guess, and protect them from those "evil derivatives that will be the end of the world", CDO's are much safer :rofl: . Given the current overreaction on regulations on trading in the US it's not expected CFD's will get the green light anytime soon as the leverage gives the potential to stuff up in spectacular fashion if you get it wrong, as in futures.

 

As a trader CFD's (not to be confused with spread betting which didn't take off outside the UK) are a revolutionary product that allow risk management strategies unavailable with any other trading instrument, although each broker varies in this regard so you need to use the appropriate broker for the type of strategy you are looking to achieve.

 

Many CFD brokers are promoting themselves to be FX brokers these days, which they have always offered but there is no real edge in using them verses a normal FX broker who specializes in that field, the real advantages are in what you can do with equities trades, and the ability to trade multiple global markets from a single broker account.

 

Due to the carry costs on the long side which are calculated on the entire position as it rises and falls in value, not just the loaned portion as with a margin loan, a different strategy needs to be employed from other equities trading instruments to offset this cost or there is no benefit, and probably a cost, in trading CFD's (although using the leverage to free up capital for other trading instruments has some benefit, but marginal in this case as there are other ways to do this).

 

It is a BRILLIANT instrument if you can get your hands on it as a professional trader, but you have to trade it aggressively and employ all the risk management tools it affords you.

 

As many of the brokers are just market makers they can adjust the tick value on instruments such as S&P, Dow, Oil & Copper to make it more tradable for small accounts as well instead of trading the full futures contracts or mini's. The downside to market makers is they can be a %%$##^&&^$## pain to deal with sometimes, and the data on their own charts is not to be trusted in many cases (I use eSignal, Amibroker and other data sources and just execute on their platforms, and dispute any "odd" prices).

 

But if you can swing a way to trade them, do so! You won't find many trading educators that understand them though or how to really get the big gains out of them, it's still a niche very much at this point in time, and your results are only limited by your creativity with your money management strategies.

 

Options still have their place as they have unique strategies like straddles & spreads, but the expiry sucks from a straight direction trade point of view, especially if you stuff up the volatility component.

 

I <3 CFD's, I simply couldn't imagine how my trading plan could exist without them!

 

:hijacked: :rofl:

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Guest Tresor

Can someone please post a chart of spread betting?

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The charts are the same as the instrument you are betting on. It's pretty much like the FX bookies. You bet X pounds a tick/point on the movement of a financial instrument. So for example I could take a long bet on the ES at 5 quid a tick. The spread bet company will be the counter party though may chose to hedge their book in the real market if it gets too lopsided.

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adding to what Blowfish says - the important part to remember is that it is a BET.

(dont let the word spread confuse)

 

It is much like the FX brokers that offer varying levels of leverage and varying amounts you can bet on direction. There in lies a lot of the flexibility.

 

One point that I am not 100% sure of however is the taxation point of view. While everyone gets excited that the gains are tax free in the UK, does that not mean that losses are not tax deductible?

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adding to what Blowfish says - the important part to remember is that it is a BET.

(dont let the word spread confuse)

 

It is much like the FX brokers that offer varying levels of leverage and varying amounts you can bet on direction. There in lies a lot of the flexibility.

 

One point that I am not 100% sure of however is the taxation point of view. While everyone gets excited that the gains are tax free in the UK, does that not mean that losses are not tax deductible?

 

I believe they are not though might be mistaken. This appears to cover a lot of the ins and outs So is Spread Betting really tax-free?

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The charts are the same as the instrument you are betting on. It's pretty much like the FX bookies. You bet X pounds a tick/point on the movement of a financial instrument. So for example I could take a long bet on the ES at 5 quid a tick. The spread bet company will be the counter party though may chose to hedge their book in the real market if it gets too lopsided.

 

Hi Blowfish,

 

This is almost an accurate description, and it's interesting that you know that the spread bet company hedges their book (most people seem to imagine that they hedge each individual trade rather than their net exposure, which is ridiculous, not least because they allow spread-bettors to take positions that are smaller than the value of a single contract in the underlying market).

 

One thing that is unusual, however, is for the instrument the spread betting company quotes to track the underlying instrument directly. A typical instrument would track an actual index value rather than a futures contract. They give these names like 'SPX' or 'WALL STREET'. This means that you can't reliably use charts of the ES or even the Spooz to trade the 'SPX'. Hence you have to rely on the spread betting company's own charts and this means they can restrict the information with which they provide you (they don't typically provide volume data, for instance). In short, they 'make' the market.

 

If you're willing to pay a larger spread you can spread bet on instruments that do track an underlying futures market accurately, but the spreads make these completely unsuitable candidates for intraday trading.

 

Hope that's useful.

 

Bluehorseshoe

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A CFD is an agreement between an investor and a broker to exchange the difference between the value of an underlying asset – a share, commodity or stock market index, for example – at the time the contract was opened.

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