Contract For Difference - CFD

Contract For Difference - CFD

Postby kennynah » Thu Sep 25, 2008 7:13 pm

There was a discussion somewhere in this forum and I wanted to highlight this, as I deem it very critical for all to realize the dangers of using CFD as a trading tool. Sorry that I am very blunt when I say that trading in CFD is a foolish affair.

Take care and you have been warned !!!

***************


some one in this forum wrote:what is the difference between cash (shorting) and CFD shorting?

I just spoke to my broker and they say that the SGX ruling only applies to cash (shorting). CFD... short ...as per normal.


cash shorting, in this case, is taking a Short position on an exchange traded underlying, such as Stock.

CFD is offered by a Market Maker, like Saxo Capitals, that emulate the exchange pricings of those underlyings they offer to their clients...so, u see Cosco in Saxo's screen and you see the bid and ask...these bid and ask is technically NOT the real bad/ask that is floating at the SGX...saxo, picks up these quotes, run thru their system and flash out their own COSCO quote, which is almost very similar and most times, similar to the SGX quotes. Why do they do this? bcos, they are the HOUSE....they take opposite sides to every of your bet, u enter buy order and it gets done, it is SAXO that sold u, not another trader somewhere else. CFD is therefore possible in this case. SGX cannot offer CFD becos they are NOT the house, they dont accept your bets, they are only an exchange, an intermediary. they earn from exchange fees from retailers and brokerages who pay to subscribe to SGX trading system.

CFD is Contract For Difference, which means, it is an undertaking to pay or receive a Difference in Pricing of the underlying you contract to buy or sell. Becos CFD do not require one to pay the full amount of the underlying during purchase, it is a LEVERAGE tool. Eg, COSCO @ $2, Long 1 lot will cost $2000 at any brokerage in singapore, unless they extend you margin account. Long 1 lot of COSCO CFD at $2, will cost you significantly lesser. Perhaps only 10%, such that you pay only $200 instead. This is 10 times leverage. One prospers and dies with leverage. Very sharp sword, i wont ever play with CFD. CFD is tempting only becos of the very high leverage it offers that normal brokerages do not. It is also a tool to guarantee poverty and even bankruptcy...pls dont try it.

Now, if you Short a stock from SGX thru your ordinary broker, you need to marginalize it, at a certain % of the price of that stock. Short 1 lot Cosco at $2, may require $1000 (50% margin), pay borrowing fees, subject to paying dividend pay out...

BUT with CFD.... no worries about such a high margin...maybe 10% instead of 50%, no need to pay for borrowing...(heck, they pay you instead to Short bcos you receive "financial" interests), no need to pay any dividend (becos, CFD does not deal with REAL stocks; CDP will NEVER register any of your CFD trades; it's monopoly script created by the CFD HOUSE, as i have explained)...

anyways....very long and loh soh....knn...

DONT PLAY CFD...in short or Long!!!!!
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Re: Contract For Difference - CFD

Postby sidney » Thu Sep 25, 2008 8:16 pm

Dear kenny, very good explaination. Been very curious abt CFD abt how it functions.

I took your advice seriously.
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Re: Contract For Difference - CFD

Postby ishak » Thu Sep 25, 2008 11:45 pm

I use CFD mainly to short, and cash to long.

I don't over leverage though and margin calls are always within my budget.

CFD is just a tool and with all tools, wrong usage can be dangerous.
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Re: Contract For Difference - CFD

Postby kennynah » Thu Sep 25, 2008 11:53 pm

ishak,
i agree with you observation that knowledge is key in using CFD here.

i like to ask you, and if you are willing to share with us all, that'll be great...

during the meltdown of indexes after 911.... did your CFD market maker open shop for you to short stock/indexes/etf/whatever or they refuse to accept your trades?

since i dont use CFD, i need proof to convince all how one-sided CFD houses can be... if they indeed refuse to admit trades, or severely limit shorts, during those melt down days after 911,
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Re: Contract For Difference - CFD

Postby ishak » Fri Sep 26, 2008 12:03 am

I did not short the market during 911 as i had other commitments then and thus not able to participate in the market, very sad.

CFD is trading with the broker house (as you rightly pointed out) which might not buy or sell the underlying shares that you are CFDing. I guess the broker house has certain trading limit (either exposure risk or amount of available shares) since they can declare a certain share cannot be shorted or longed using CFD.

I don't see that as being one-sided, as they too have to limit their losses. Same thing for table limits in casino.
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Re: Contract For Difference - CFD

Postby kennynah » Fri Sep 26, 2008 12:13 am

hahaha....it is one sided for sure...it is never quite as fair as an exchange...

just a simple example...they stop offering CFD on a share that they are too Long as a result of extreme Shortings by customers... they can widen the spread as and when they like...bid/ask spreads are generated by them, remember, they can choose to raise margin requirements as and when they like and catch everyone into margin calls

they limit their losses obviously from squared trades and those outstanding are all hedged accordingly...they make money from customers losing money...pure and simple..

u r right, they are casinos...and casinos dont open door for people to win in the long run...

anyways....take care trading CFDs
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Re: Contract For Difference - CFD

Postby ishak » Fri Sep 26, 2008 12:20 am

kennynah wrote:... they can choose to raise margin requirements as and when they like and catch everyone into margin calls ...


Margin calls are not raised by them but rather by the movement of the share price.

When extreme market conditions happen, it becomes natural for them to stop shares from being shorted as anyone will see it as a confirmed bet.

Thanks for the exchange, i am always careful when it comes to money. :lol:
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Re: Contract For Difference - CFD

Postby sidney » Sat Sep 27, 2008 4:35 pm

Since Mas will curbing on shorts, will it apply for CFDs as well?
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Re: Contract For Difference - CFD

Postby iam802 » Sat Sep 27, 2008 6:46 pm

No. There is no impact on CFD short. I have confirmed this with POEMS CFD department (unless there is new rulings that I do not know of).

However, K has highlighted that CFD is provided by the 'house'.

They can choose to only allow you 'long-only' when the odds are against them.

And this is where I see the real limitations. Personally, I prefer the flexibility of changing direction if I find myself on the wrong side. But, with 'long-only', that means I can only cut-loss and stand by the road side.

Though, lots of time, whenever I am on the wrong side, I noticed it is always a simple mistake of not consulting the 'kumo'. So, I won't blame the tool .... rather my mistake is the real devil.
1. Always wait for the setup. NO SETUP; NO TRADE

2. The trend will END but I don't know WHEN.

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Re: Contract For Difference - CFD

Postby blid2def » Sat Sep 27, 2008 6:57 pm

"Kumo is your friend"

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