CFDs and franking credits - Aussie Stock Forums

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  1. #1

    Default CFDs and franking credits

    Two curious question.

    1 - From what I understand: if you hold a long CFD position in a company and it goes Ex-Div, your account is credited with the amount of the dividend.
    Is the reverse true if you are short? i.e. is the amount of the dividend debited from my account?

    2 - From what I understand: Franking credits are not applied to CFD positions. So if I am long a CFD position in a company who pays a fully franked dividend; I have no rights to those franking credits.
    Who then is benefiting from these franking credits? The CFD provider who is 'loaning' me the shares?

  2. #2

    Default Re: CFDs and franking credits

    1. yes, if you are short you pay the dividend (your account is debited the dividend amount.

    2. the person who owns the shares (i.e. the owner your provider borrowed them from)

  3. #3

    Default Re: CFDs and franking credits

    Quote Originally Posted by dutchie View Post

    2. the person who owns the shares (i.e. the owner your provider borrowed them from)
    Hmmm, so an added benefit to the person who loans the shares hey?
    So one would potentially be 30% (franking credits) better of if they traded shares on a margin VS trading CFDs and missing out on franking credits.

    Or trade CFDs on shares with non franked Dividends.

    It just seems a little 'unfair' that the franking credit, or the equivalent dollar amount is not passed onto the CFD holder (me). Is this simply because it is "too complicated" for entity who is loaning you the shares to pay you the franking credit and then wait until tax time to reclaim it?

    This isn't a "whinge" but more a genuine query in trying to figure out how it all works.

  4. #4
    Can be found on the bid Trembling Hand's Avatar
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    Jun 2007

    Default Re: CFDs and franking credits

    CFD trades are naked. They are merely a contract between two parties. Mostly they have no like to the underling.
    Who is the happier man, he who has braved the storm of life and lived or he who has stayed securely on shore and merely existed? -Hunter S. Thompson

  5. #5

    Default Re: CFDs and franking credits

    From what I understand.
    If you are long CFDs you are not entitled to imputation (franking) credits of the dividends
    If you are short CFDs you will be required to pay the value of the divident plus the value of the imputation (franking) credits
    Yes, a bit unfair for the trader

  6. #6

    Default Re: CFDs and franking credits


    To expand on TH, there is often no underlying. There is no obligation for the CFD provider to buy the actual share when you take a long position, and they'd only do that to hedge against your win, depending on how many of their customers are long or short a stock and how much risk they're willing to take on.

    Think of a CFD as a bet. You bet the CFD provider that a share price will change. They take the other side of that bet. No actual shares have to be bought by anyone. No shares are being loaned to anyone.

    Dividends are only included at all to balance out the change in share price when it goes ex (since, again, a CFD (in this case) is a bet about the share price).

  7. #7

    Default Re: CFDs and franking credits

    By coincidence, I just read this: http://www.thebull.com.au/articles_detail.php?id=2119

    Note that BHP and NAB are in the top 5 for both long and short. So if, for example, their customers had 100 shares short BHP for every 90 long, they'd only have to buy 10 shares for themselves to be fully hedged. But with a lot of the traders who are on the right side of the trade still likely to be stopped out or do something stupid, wouldn't even need to do that much. That's why they can offer such big margins - their actual outlay is pretty small*.

    So back to the topic: they'd only be getting franking credits on less than 10 actual shares out of the 190 "virtual" shares on customers' books. Do overseas companies get franking credits anyway? Either way, they're certainly not raking in franking lootz.

    (*Obviously that's all complicated by the actual profitability of their average customer (there's probably more folk on the losing end stopping out early than winners who stop *too* early), but I'm sure they know their stats sufficiently to keep their hedging at a minimum (I mean, they can actually see their customers' stops). The average customer is, famously, negatively profitable, so...)
    Last edited by SmellyTerror; 21st-March-2010 at 03:39 AM.

  8. #8

    Default Re: CFDs and franking credits

    1. When you go short, you're lending the position and buying it back to close the trade. The dealer is automatically the buyer of your (short) sell position and recieves the dividend amount from your account at Ex-div date. Because you lending a buy position to the dealer on the other side of the trade, they recieve daily interest on the position.

    2. No one benifits from the franking credit because neither you of the CFD dealer own the stock. A CFD is a contract for the daily price difference of the stock to be debited or credited to your account and not share ownership. You will recieve the dividend amount on a long position, but not the franking credit.

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