Required margin question

[Mrmagoo]

Say a stock has a required margin of 5% and you buy them using 20% of the price a deposit does that mean the price would have to fall 15% before you got a margin call ?

So say it costs $1000, the required margin is $50, you put down $200 and the shares fall in value to $300, you still wouldn't get a call (assuming the slippage or whatever they call it is not worth $100).

Also I buy my shares with CMC but don't use any leverage are they decent for CFDs ? I have heard bad things on this forum. I just want to get some leverage so it can be comparable to investment property.

 

[cynic]

Re: Required margin question.

Say a stock has a required margin of 5% and you buy them using 20% of the price a deposit does that mean the price would have to fall 15% before you got a margin call ?

Based upon my rough calculations the stock would need to fall by nearly 15.8% before the portfolio erodes sufficiently to breach the margin requirements, the reason being that the deposit requirement will decline proportionately with the decline in the value of the stock. Please note that this calculation does not account for the erosive effect of other charges (i.e. interest, commissions etc.) associated with opening and holding positions within your leveraged portfolio.

So say it costs $1000, the required margin is $50, you put down $200 and the shares fall in value to $300, you still wouldn't get a call (assuming the slippage or whatever they call it is not worth $100).

In this scenario you would not only be heavily in margin, you'd actually be in deficit (i.e. owe more money than is actually in your trading account!). In my experience of such circumstances, CFD providers usually liquidate the client's holdings and demand that the client deposit additional monies to rectify the deficit.

Also I buy my shares with CMC but don't use any leverage are they decent for CFDs ? I have heard bad things on this forum. I just want to get some leverage so it can be comparable to investment property.

I cannot make specific comments on CMC as I have not used them. However, I would caution anyone considering OTC CFD products to approach with extreme care! After having traded for some years with several providers, my confidence in the integrity and professionalism of this industry has been severely eroded.

 

[Mrmagoo]

Re: Required margin question.

I cannot make specific comments on CMC as I have not used them. However, I would caution anyone considering OTC CFD products to approach with extreme care! After having traded for some years with several providers, my confidence in the integrity and professionalism of this industry has been severely eroded.

I have heard this also, but you can't get anywhere these days without borrowing money.... if I just put away part of my pay every week like a good little boy in 10 years time I'd have lost money if I put it in the bank and would have made bugger all if I'd just bought ordinary shares.

With a bit of leverage with 10 years of "saving" you can make a lot more... which is all property investing has really been about, borrowing money.

In this scenario you would not only be heavily in margin, you'd actually be in deficit (i.e. owe more money than is actually in your trading account!). In my experience of such circumstances, CFD providers usually liquidate the client's holdings and demand that the client deposit additional monies to rectify the deficit.

.

erm. Thats right.The stock fell by 70%.

 

[cynic]

Re: Required margin question.

I have heard this also, but you can't get anywhere these days without borrowing money.... if I just put away part of my pay every week like a good little boy in 10 years time I'd have lost money if I put it in the bank and would have made bugger all if I'd just bought ordinary shares.

With a bit of leverage with 10 years of "saving" you can make a lot more... which is all property investing has really been about, borrowing money.

I understand what you're saying. Just remember that the mighty sword of leverage cuts both ways! Just as profits can be amplified - so too can losses!

It's also important to consider the demonstrable inefficacy of financial regulation within Australia. The repeated failure of ASIC to prohibit the inclusion of clauses that allow providers to, at their sole discretion, take the opposing side of the trade (i.e. bet against their own clients!), invent their own prices, alter margin requirements without notice, and even cancel profitable trades are amongst just a few of the things that lead me to question the wisdom of my continued patronage of this industry.

 

[cbc]

Trade the Asx cfds mrgoo, that's if u want to trade cfds.



God only knows what will happen to you trading OTC.

 

[Mrmagoo]

Re: Required margin question.

I understand what you're saying. Just remember that the mighty sword of leverage cuts both ways! Just as profits can be amplified - so too can losses!

It's also important to consider the demonstrable inefficacy of financial regulation within Australia. The repeated failure of ASIC to prohibit the inclusion of clauses that allow providers to, at their sole discretion, take the opposing side of the trade (i.e. bet against their own clients!), invent their own prices, alter margin requirements without notice, and even cancel profitable trades are amongst just a few of the things that lead me to question the wisdom of my continued patronage of this industry.

invent their own prices ? : o cancel profitable trades ? how ?

Also leverage cuts both ways, but the price does usually go back up..

So it is okay to fork out $600,000 for an investment property @ 5% leverage but people talk about shares like they're evil. Why ?

 

[Mrmagoo]

So what is the source of the risk ? Dodgy crap by the provider or volatility in the stocks ?

 

[cynic]

So what is the source of the risk ? Dodgy crap by the provider or volatility in the stocks ?

All of the above!

invent their own prices ? : o cancel profitable trades ? how ?

My current provider has a number of generous clauses in their PDS/Customer Agreement document. An excerpt that I find particularly disconcerting is "...may, in its absolute discretion, quote different prices to different Clients."

The last time my provider took the liberty of cancelling one of my profitable trades, they simply closed it at exactly the same price at which it had been opened. My connection to their platform was "coincidentally" interrupted whilst this was occurring. My connection resumed a minute or two later. That was when I discovered my trade was no longer present. In fairness to the provider, I believe that the trade did meet the criteria for manifest error(which is why I forgave them on that occasion) but I am annoyed that they didn't have the professional courtesy of promptly alerting me to the situation and explaining their actions. (After all what's 5,600 euros between friends?)

Also leverage cuts both ways, but the price does usually go back up..

Supposing they do go back up, will your position still be open by this time? Or will your provider have happily closed your trades out at a sizeable loss due to margin?

So it is okay to fork out $600,000 for an investment property @ 5% leverage but people talk about shares like they're evil. Why ?

That's a bit like comparing methanol to bitumen. Both could be considered flammable, but the fluid with the lower viscosity evaporates faster and is easier to ignite-as such it is perceived as more dangerous. Real Estate transacts at a much slower pace and consequently needs to be observed and considered over a longer time frame. It's no surprise that certain dynamic similarities escape people's attention!

 

[Mrmagoo]

All of the above!


Supposing they do go back up, will your position still be open by this time? Or will your provider have happily closed your trades out at a sizeable loss due to margin?


That's a bit like comparing methanol to bitumen. Both could be considered flammable, but the fluid with the lower viscosity evaporates faster and is easier to ignite-as such it is perceived as more dangerous. Real Estate transacts at a much slower pace and consequently needs to be observed and considered over a longer time frame. It's no surprise that certain dynamic similarities escape people's attention!

It worries me that they can just magically make stuff up. So if you have a 5 grand position they could just magically cancel your profit or turn your profit into a loss if it drops slightly and they decide to change the margin requirement to something really high ? If it is about even could they just change the price to a slight negative and then cancel the whole position because they expect it to drop further ?

Are you sure they're not just protecting against extreme losses that the client can't cover - i.e stuffing up their business. Or are they genuinely criminally vindictive, i.e betting against clients and thereby changing the apparent odds.... ? Also what is this about ASX CFD aren't all CFD over the counter - asx is just a brand.

The idea for me would be to use very small positions at first to see how it goes.

 

[cynic]

It worries me that they can just magically make stuff up. So if you have a 5 grand position they could just magically cancel your profit or turn your profit into a loss if it drops slightly and they decide to change the margin requirement to something really high ? If it is about even could they just change the price to a slight negative and then cancel the whole position because they expect it to drop further ?

Are you sure they're not just protecting against extreme losses that the client can't cover - i.e stuffing up their business. Or are they genuinely criminally vindictive, i.e betting against clients and thereby changing the apparent odds.... ? Also what is this about ASX CFD aren't all CFD over the counter - asx is just a brand.

Rather than venture an opinion that may expose me to the risk of unwelcome litigation, I refer you to Section F (Pages 45 to 49) of ASIC report 205 ("Contracts for Difference and retail investors"). Upon reading this report, it appears that 35% of complaints to ASIC were categorised as dispute type : "Misconduct (including misleading and deceptive conduct and unconscionable conduct)", and another 41% were categorised as "Insider trading and/or market manipulation".
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rep205.pdf/$file/rep205.pdf

A tabulated description of three different CFD business models, Market Maker (OTC),Direct Market Access (DMA) and Exchange Traded (ASX) may be found on page 22 of the following document:
https://www.moneysmart.gov.au/media/173820/thinking-of-trading-in-contracts-for-difference-cfds.pdf

Although the aforementioned document contains a number of materially erroneous and/or misleading statements (ASIC has struck yet again!), it does serve to give some general insight into the nature of CFD products.

The idea for me would be to use very small positions at first to see how it goes.

Caution such as you've described is highly advisable to anyone contemplating any new venture, but do not forget to read and consider the full ramifications of the fine print!