Index CFDs

Milk Man · 8 December 2005

With CFDs if you have $50k in your account and start a $100k position you pay the interest on the entire $100k. So even if the interestrate is lower on the CFDs you can end up paying more in interest.

Is this true? Doesnt sound very appealing if so.

mit · 8 December 2005

If after 12 months you make 20% and have $120k, with a Margin Loan you pay interest on the original $50k still but with a CFD the interest is payable on the entire $120k.

Some CFD providers will pay interest (CMC 3.5%) on the cash in your account that is in excess of margin.

HOWEVER

CFDs are good where you have such tight stops that leverage greater than 65% makes sense.

Another reason is where you have little cash. A round trip for a $9k position in a Comsec margin loan is $59. With CMC it is $20 but you have to watch the hidden brokerage in the spread. With Macquarie it is $36 but you get DMA so no spread issues.

markrmau · 8 December 2005

I think this interest rate thing is a bit of a furphy. I would like to point out 2 things.

1. Even if you are using margin lending over an index fund, you are EFFECTIVELY paying interest on the entire portfolio valuation at any point in time. Why? Consider two scenarios:

a) you borrow $50k at 7% p.a. and contribute $50k for a $100k portfolio. At any point in time, you could sell your 50% of the portfolio and stick it in the bank and recieve the ONCR (well in theory). So EFFECTIVELY, you are paying the ONCR on YOUR contributed funds anyway.

b) You contribute $10k, and use marketech to buy the index, paying (ONCR+1%)*100k.

Probably not a hell of a lot of difference.

2. The real reason that an investor (as opposed to a trader) would use margin lending is simply because the capital gains tax is halved after holding for >12 months. CFD's will not have the CGT halved, regardless of time held.

[This post is not intended to be used as financial advice, and may contain errors]

mit · 9 December 2005

ONCR?

mit · 9 December 2005

mit said:
ONCR?

Overnight Cash Rate (answering own question)

MIT

robots · 31 December 2005

hello,

forget CFD's, may as well "bet" straight out on indices, stocks and commodities with IG Index.

i think all AXS200 stocks available, sure there is a spread but as you know you pay for everything.

CFD's seem to be a complex betting system

thanks
robots

mlennox · 3 January 2006

RichKid said:
But be careful about the general problems with CFD providers- pricing, liquidity, spread, risk of losing your capital if they go under etc

Also, lack of franking credits via CFD's.

pricing? liquidity? spread?

don't have a clue what your going on about with pricing.

into and out of a position with CMC will cost you $10 if your trading anything outside the top200 its best to not go with CFDs due to the interest payments you will need to front up with if the stocks are of low liquidity, spreads are normally 1c away from the price in australia in america it can go as far as a dollar away from the actual price but improves once the bell chimes, CMC won't go under they've been around for 5 years.

mlennox · 3 January 2006

Milk Man said:
Is this true? Doesnt sound very appealing if so.

your forgetting that if the price goes the way you planned you make that on 100k not 50k this is the whole benefit of CFDs

mlennox · 3 January 2006

randomtrader said:
I've been trading options for two weeks now and have over $5000 profit. It took me two years to learn but it is very worth it. Don't know anything about CFD's. What are the major differences?

similar to options in that a small price move can mean a bigger profit. Though as most are saying the providers of CFDs are not very willing to part with there dosh.

mlennox · 3 January 2006

mit said:
Hi WhatHell

A Margin Loan is like buying a house. You put down a deposit and borrow the rest. If you want a $100k position and plop down a $50k deposit then you are paying interest on the $50k.

With CFDs if you have $50k in your account and start a $100k position you pay the interest on the entire $100k. So even if the interestrate is lower on the CFDs you can end up paying more in interest.

This however is just one consideration whether to use CFDs or a margin loan of course.

MIT

obviously you'd use a margin loan on anything out of the top 50 aussie stocks, as the liquidity vs interest is :goodnight

Smurf1976 · 3 January 2006

mlennox said:
CMC won't go under they've been around for 5 years.

I'm not commenting on CMC themselves, I know nothing about them as a company, how financially sound they are etc. but IMO the argument that something won't go under just because it's been around for 5 years is not a valid one. Plenty of businesses have been around a lot longer than that and eventually gone under - Pasminco was around as a company for over a decade, Ansett a lot longer than that. Both went broke. Plenty of others could be added to that list both in Australia and worldwide.

As I said, this isn't intended as a comment about CMC.

mlennox · 3 January 2006

yeah no i don't mean just due to how long they've been around that they won't go under i'm saying as long as theres a market they can make money out of why would they?

troll · 11 June 2006

try trading STW, this is an exchange trade fund over the S&P ASX 200. The spread is tight becuase its exchange traded.

RichKid · 11 June 2006

troll said:
try trading STW, this is an exchange trade fund over the S&P ASX 200. The spread is tight becuase its exchange traded.

...but watch out for the ex-div drop as unlike the xjo this one pays divs with franking- see the STW thread. Spread can be wide from my limited observations.

Index CFDs

Milk Man

mit

markrmau

mit

mit

robots

hello

mlennox

mlennox

mlennox

mlennox

Smurf1976

mlennox

troll

RichKid

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