Mcgrath learns CFDs

Triathlete said:

I think the idea is after year 1 you have doubled your original 25K ..

So in the 2nd year your own stake is now 50K x the 5x leverage so that means an account size of 250K trade not 216K

After year 3 your own stake would have grown to 100K and the with leverage you are now trading a 500K account......not 259,200 and so on......basically you are doubling your original stake year on year with the 5x leverage if you can achieve the 20% return per year...

I am only new to CFDs myself and only use 10% of my total portfolio for this type of trading and no more then 3 or 4 positions at any one time.

As has also been mentioned the risk needs to be under 2% per trade otherwise I will reduce the position size..

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Thanks makes sense now , end up with 3.2m after 7 years. Just a bit misleading whereever you read it to state 15to20% instead of the actual 100% return on investment invested, makimg it sound easier than it actually is.

craft said:

Even if your profits do dwarf the interest charge - its poor trading business practice to pay anymore for your leverage then you have too. There are far more cost effective ways to leverage. Unless CFD companies provide something superior (shorting ability, platform, finance that you otherwise would not be credit worthy for) then I don't see the benefit of them especially considering the counterparty risk and the potential for less transparency than tradional exchange facilitated transactions.

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CFD providers charges anything from 1.5-3% above a base reference rate (RBA cash rate for ASX), and they pay you cash rate less 1.5-3% (which means zero... I don't think they go negative) on your shorts. They will charge / pay finance costs on the full position size, marked to market each day, regardless of how much margin you put up.

Some providers used to pay interest on your account balance but that rate is usually quite low (and that's few years ago).

So if you have a line of credit costing 5%, using CFD leverage will work out roughly similar, with the added benefits of lower brokerage commission (depends on how much volume you do). If you have just pure cash sitting around then CFD would be more expensive.

The amount of capital one should have in your CFD account should obviously be as little as necessary to support current positions, daily P&L fluctuations and opening of new positions. A lower account balance reduces counterparty risks... but having large leveraged positions when your CFD provider gone belly up is a scary proposition in addition to the return of your capital.

Further to skc's comments, I thought I would mention that some CFD providers do apply interest related debits to short positions on their cash (as opposed to forward) index CFDs whilst others do not. I haven't traded ordinary share CFDs, so I cannot confirm whether these providers apply the same rules to those offerings.