CFDs

Learn about CFDs

1. Getting Started 2. Trading Stocks on Margin 3. Basic CFD Trade Mechanisms 4. A Closer Look at CFD Trade Orders 5. The Mechanics of a Market Maker CFD Trade 6. The Mechanics of an Exchange Routed Trade

Getting Started

Welcome to the first in short series of educational pieces designed to introduce stock investors to the world of Contracts for Difference (CFDs).

We will start by talking about some of the basic features of CFDs including some of their advantages and shortcomings compared to traditional stocks.

What are CFDs

Contracts for Difference are a stock derivative product that enables investors to participate in the price movement of an underlying stock or stock index without taking ownership of the underlying instrument itself.

CFDs offer some important advantages over traditional stocks that make them particularly interesting to short-term traders.

Trade CFDs on live tradable prices

CFDs can be traded directly on live (un-delayed) tradable prices, while conventional stocks often require you to establish an exchange agreement to trade on live stock prices.

A CFD price behaves exactly the same as the underlying stock price, but often the trading fee is already added to the Bid/Ask spread. In many cases, this is the only 'fee' you pay for trading the CFDs, so you know exactly what your profit or loss is, including trading fees, when you close positions.

Margin trading

Margin trading allows you to magnify small intra-day price swings by depositing a fraction of the trade value in collateral. Margin rates vary between CFD providers; Global Trading currently offers leverage of up to 10x (10% margin requirement) for stock CFDs where an investment of only USD 10,000 can be used to command a CFD position of up to USD 100,000.

Of course, margin trading can work against you as easily as for you, and while profits can be magnified so can losses. You should use leverage with caution.

Short selling to take advantage of falling markets

CFDs also offer the advantage that you can short sell a stock to take advantage of downward price movements as easily as buying the stock (going long). Executing a short sell is done in exactly the same way as a long trade and can be done on a live tradable price quote.

Short selling a stock CFD is subject to specific rules in some countries.

Eliminates stock trading costs

CFDs also hold the advantage that they are not subject to a number of costs that traditional stocks are subject to:

Custodian FeesMost stock trading establishments charge a yearly custodian fee for holding foreign stocks to cover the administration of holding the stock for you. Additionally, you may also have to pay cross-board transfers for stocks and for other corporate action such as dividends and stock splits. CFDs are not subject to these costs, but are faster and more convenient to trade than physical stocks.

No Stamp DutyAs you are not physically buying stock, in many countries profits from CFDs are currently not subject to the same same taxation as profits from stocks. This is one of the major contributing factors to the popularity of CFDs in some countries.

Magnify Dividends as well as Price Movements

If you hold a long CFD position on Ex-Dividend Day, you receive dividends for that CFD in the same way as if you held the stock. So when leveraging your stock investment on margin, you magnify dividend payments as well as price swings for the stock.

Note that if you are holding a short CFD position, you will be obliged to pay dividends on your position.

Overnight Interest on CFD positions

When you buy a CFDs, you are effectively borrowing money to pay for the CFD and you own money is there only to cover potential losses from the CFD position. For long CFD positions held past the end of the day's trading on the exchange, you pay overnight interest on the amount borrowed and this must be taken into consideration. In reality, this can make CFDs suitable mostly for short-term positions as longer term, financing costs can eat into potential profits.

CFD positions closed before the end of day on an exchange are not subject to overnight financing charges, and CFDs are therefore well suited to intra-day trading.

Short CFD positions carry no financing charge and you may even receive a small interest component.

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Trading Stocks on Margin

For intra-day stock trading, CFDs offer clear advantages over traditional stocks, not least margin trading. Leverage investments to magnify small price swings and multiply your profits.

Leveraging your Investment

The greatest advantage of margin trading is the ability to leverage relatively small investments for a much greater market effect. This is particularly attractive to short-term, intra-day investing where price swings are typically more limited than over longer periods. The amount you can leverage your investment depends on the trading provider; Global Trading currently allows a maximum leverage of up to:

10 times for stock CFDs – on the 21 stock exchanges we currently supportFor example, an investment of only USD 2,000 can be used to command the equivalent position of up to USD 20,000 worth of stocks on the market.

20 times for stock index CFDs – for the 11 major indices we supportFor example, an investment of only USD 10,000 can be used to command a stock index position of up to USD 200,000 on the market.

How Margin Trading Works

When trading CFDs, you deposit an amount with the bank which allows you to open and close stock positions for many times the value of your deposit. The amount you deposit is known as the "margin collateral".

When you open a trade position, this collateral is in effect untouched until you close the position again when the profit or loss is credited or debited to your account. In other words, this collateral is there to cover potential losses from your margin trading activities.

When you open a trade position, a percentage of your collateral is required to cover the position, and this amount is reserved in your account. The amount of collateral required to cover a position changes whenever the market price of the position changes. So if you already have open margin positions, the margin available for new positions is continually changing.

Margin Calls

Margin trading can work against you as well as for you, and under normal circumstances your account will not be allowed to go into debt. If the price of an instrument goes far enough against your position and your margin collateral is becoming insufficient to cover the resulting loss, you will be required to close or reduce positions, or to deposit more margin collateral to cover the new margin requirements. If you fail to take appropriate action, positions may be automatically closed on your behalf.

Margin Calculation Example

In this example we will use a stock CFD with a margin requirement of 10% and you have margin collateral of EUR 100,000 giving you up to EUR 1 Million available to invest on the market.

Say you buy CFDs for EUR 400,000 using 40% (10% * EUR 400,000 / EUR 100,000) of your available margin collateral. At this point, you have up to EUR 600,000 available to invest in other CFD positions.

If the market moves with your investmentIf things go well, and the value of stocks in your CFD position go up by 2% and you close the position, you make EUR 8,000.

If the market moves against your investmentIf the market value of your CFD position drops to EUR 320,000, your Available Margin drops to EUR 20,000 (EUR 100,000 - the loss (EUR 400,000 - 320,000)) and now only covers 6.25% of your investment (EUR 20,000 * 100 / EUR 320,000) - you have exceeded your margin and must take steps to remedy the situation:

1. Transfer additional funds of at least EUR 12,000 to cover the new margin requirements of EUR 32,000. Note that transferring EUR 12,000 will bring your Available Margin back to 10% of your position (10% of EUR 320,000) but if the CFD position falls further you will immediately have exceeded your margin again.

2. Reduce the CFD position by selling the appropriate number of shares equaling at least EUR 120,000 to bring your position down to EUR 200,000. Again, this will bring your Available Margin back to 10% (on Margin) of your position (10% of EUR 200,000), but if the CFD position falls further you will immediately have exceeded your margin again

Basic CFD Trade Mechanisms

In this edition of the CFD classroom, we give an overview of the basic types of CFD trades – to be expanded on in the following editions of the series.

In this edition, we will talk about the basic ways that you can trade CFDs. The method you chose depends on a number of factors including:

Which stock you are trading and whether your CFD provider is the market maker for the CFD of this stock

Whether you want to enter the market right now, or wait until the market price reaches a certain level

Whether you want to make sure your full order is filled or it is more important to be filled at a specific price

Whether you are participating by trading directly on the market prices in the Exchange order book

We will be expanding on some of the basic trades in the coming editions.

Direct Trading on Live Tradable Prices (Green Prices)

Trading CFDs on a displayed live tradable price offers very fast direct execution of CFD trades: When a CFD price hits a price you are interested in, you hit the Buy or Sell button and the full amount of your order is guaranteed at the price displayed. Trading on live prices is only possible if your CFD provider is the Market Maker for the CFD.

For the CFDs where Global Trading is the Market Maker, the price is displayed in green and you can buy or sell the amount of CFDs at the displayed price:

We will describe trading Market Maker CFDs more fully in the next edition of this classroom series.

Trade Orders

The other way to trade CFDs is by trade orders. Trading by order can be almost as fast and direct as trading on live prices, and by participating directly in the exchange order book, orders can be filled within seconds.

Use of Orders

Trading on live tradable prices is typically used for entering and exiting the market fast when you feel the conditions are right. Trade orders allow you to make a more

strategic approach to trading and to plan your moves up front. Taking a more disciplined approach to taking a position, you would typically use:

An entry order to trade when (if) the market reaches a specific price. A take profit order to close the position when the market price reaches a

level you expect it to reach. A stop loss position to the position in case the market moves in the wrong

direction. Note: This is always highly recommended, serious traders should always protect their positions and limit their losses in case of adverse market moves.

There are three basic order types to help you do this:

Market Orders to trade as soon as possible at the best price currently obtainable in the market. This is typically used when tradable green prices are not available.

Limit Orders to trade when the price hits or breaches a level below (for buy orders) or above (for sell orders) the current market price.

Stop Orders to trade when the price hits or breaches a level above (for buy orders) or below (for sell orders) the current market price.

We will go into much more detail about the effective use of orders in the next edition of this series

A Closer Look at CFD Trade Orders

In this edition, we give go into details of the various types of CFD trade order available.

When CFDs can not be traded on live tradable prices, they can be traded by placing orders. Trading by order can be almost as fast and direct as trading on live prices, and can be done by exchange order book participation.

Use of Orders

Trading on live tradable prices is typically used for entering and exiting the market fast when you feel the conditions are right. Trade orders allow you to make a more strategic approach to trading and to plan your moves up front. Taking a more disciplined approach to taking a position, you would typically use:

An entry order to trade when (if) the market reaches a specific price. A take profit order to close the position when the market price reaches a

level you expect it to reach. A stop loss position to the position in case the market moves in the wrong

direction. Note: This is always highly recommended, serious traders should always protect their positions and limit their losses in case of adverse market moves.

There are three basic order types to help you do this:

Market Orders

Market Orders trade to trade as soon as possible at any price obtainable on the market – use these only when you want to be filled as fast as possible and are not critical about the price you will be filled at.

Market Orders are typically used when direct trading on live tradable prices is not available, for example when your CFD provider is not the market maker for the CFD, the market is closed or for large trade volumes.

Limit Orders

Limit Orders are used to trade when the price hits or breaches a level you define (a sufficient quantity must of course be available for the trade to be executed). Limit orders are usually placed below the market for buy orders (so you buy when the price falls to a level you specify) and above the current market price for sell orders.

Limit orders to buy can also placed above the market which will execute for the volume of stocks that exist at the market price or better. This guarantees the price you will pay will never be more than the limit price you specify.

Limit orders are typically used to:

Enter the market when the market falls/rises (don't forget with CFDs you can short a stock as easily as going long) to an entry level you specify.

Close a position to take profit, when the price rises/falls to the level you predict.

Limit orders do not guarantee that your position will be filled at all if the price never reaches the price you specify. And if the price does move as anticipated, there is no guarantee that the total quanitiy of your order will be filled, but Limit Orders do guarantee the price you specify or better.

Stop Orders

Stop orders are used in a similar way to limit orders to trade when the price hits a defined level, but are used to trade against the market. So stop orders are placed above the market for buy orders and below the current market price for sell orders.

Important: Unlike limit orders, stop orders are executed when the price hits or breaches a level but there is little or no guarantee that you will be filled at that price. When the price hits or breaches your specified price, Stop Orders become Market Orders and are then filled at whatever price is available in the market. So if only a few shares are available at the stop price you specify, the rest of your order may well be filled at another level. This uncertainty is sadly unavoidable but none the less bad news when you are trying to protect yourself against losses.

The most common use of stop orders is to close positions to limit losses if the market heads in the wrong direction from that you predicted. For example if you are holding a short position, you would place a stop order to buy at a price above your entry price to close your position and limit your losses.

Another use of stop orders is to wait for a market turn-around. So you might place a stop order to open a long (buy) position if the market is trending in the right direction and the price moves above the current price.

Linked Orders

To complete this introduction to basic trading mechanisms, we need to talk about linked orders.

A limit order to open the position when the market hits the right price A limit order to close the position again to take profit if the market behaves

as you anticipate A stop order to close the position to limit losses if things go wrong

If Done OrdersTake profit and stop loss orders should not be placed at the same time as the entry order as they might be executed before it. You would then be in an unpredictable position. They should be placed if, and only if, the entry order executes. We can do this if we link the take-profit and stop-loss orders to the entry order in an If Done arrangement.

One Cancels the Other (OCO) OrdersFurthermore, if the take profit and stop loss orders are active in the market, when one of them executes, the other will be left floating around and could execute a spurious trade. To prevent this, these two orders need to be linked together in another relationship called One Cancels the Other, often called 'OCO' for short. In this arrangement, as soon as one of the orders executes, the other order will be removed.

3-Way OrdersFrequently you want to place all 3 orders together; an entry order to open the position linked to 2 orders which are placed to close the position (either to take profits or limit losses) which themselves are linked as OCO orders. This is what we call a 3-way or contingent order.

The Mechanics of a Market Maker CFD Trade

In this edition, we walk through a the easiest type of CFD trade – where the CFD provider is acting as Market Maker.

Trading a CFD is usually quite simple – a matter of selecting a stock, entering an amount and clicking Buy or Sell. But there are some significant differences you may need to be aware of, depending on whether your CFD provider is acting as the Market Maker for the CFD you are trading or if the trade is routed to an exchange.

In this edition, we will show how simple a CFD trade can be when your CFD provider is the Market Maker. Of course the exact mechanics of a CFD trade is dependent on

the CFD provider and the trading platform, but we will take a walk through making a CFD trade using the Global Trade Station 2 trading platform to give you an idea of the basic concepts.

Market Maker CFDs

When your CFD provider is the Market Maker, you buy and sell the CFD directly from your provider and they are in turn hedging their net CFD exposure on the market. This is faster, easier and more convenient for you: Market Maker CFDs have the great advantage that they are traded directly on a live tradable price (up to a certain trade volume). So if the price is shown in green, your trade will be filled directly at the price displayed:

Out of the 2,500 stocks available as CFDs from 21 stock exchanges that we support, we are currently the Market Maker for around 500 of the most popular. So if you are trading major "blue-chip" companies, we are likely to be the market maker.

Trading a Market Maker CFD

Trading a Market Maker CFD is trading at its easiest: It is a matter of selecting the stock, entering the number of shares and clicking Buy or Sell.

If you have installed our demo Global Trade Station 2 trading platform, why don't you open it up and try this out yourself.

In Global Trade Station 2, you trade CFDs through the CFD Trade Module. If you don't have this open, open it from the Trading > CFDs > CFD Trade menu.

When the price is green, you buy and sell directly at the price displayed (all trades confirmed immediately).

Yellow Indicative Prices

For some Market Maker CFDs trades it is not possible to offer a firm tradable price (for example for trades with large share volumes and in unusual market conditions); instead, a yellow indicative price is shown. The trade is then treated as an "exchange-routed trade" which will be described in the next edition of this educational series.

The Mechanics of an Exchange Routed Trade

In this edition, we walk through the mechanics of a CFD Trade that is routed to the exchange order book.

As explained in a previous edition, the exact mechanics of making a CFD trade is dependent on the CFD provider and the trading platform, but we will take a walk through making a CFD trade using our CFD trading platform which is routed to the stock exchange.

Out of around 2,500 stocks available as CFDs from the 21 stock exchanges we support, we are currently the market maker for around 500 of the most popular. So if you are trading the major "blue-chip" companies, we are likely to be the market maker (up to a maximum amount of shares). The remaining around 2,000 stocks and trades in stocks above our maximum amount are routed directly through to the exchange. It is trading these stock CFDs that we will be discussing in this edition.

If you have our demo download, why not open it up and try this out yourself.

In Global Trade Station 2, you trade CFDs through the CFD Trade Module. If you don't have this open, open it from the Trading > CFDs > CFD Trade menu.

Order Books

At the stock exchange, an order book is maintained for each stock which contains – amongst other things – the number of shares that can be bought (at the Ask price) and sold (at the Bid price) at different price levels.

The current market price that shares can be bought and sold is at the top of the order book and is known as the "Yellow Strip Price".

Volume Weighted Average PriceAs the order book can move faster than the data can be processed and routed to you over the Internet, the price displayed in the trading platform is only indicative of the current market price from the order book. The price displayed also takes into account the number of shares you entered for the trade. So for example, if only 500

shares of the German company Altana are available at the current market price of 44.90 and you want to buy 1000, the remaining 500 shares will be filled at the next price level 44.91. This price is called the volume weighted average price.

The overall price displayed will then be ((500 * 44.900) + (500 * 44.910)) / 1,000 = 44.905 EUR/Share. The 0.04 EUR/Share difference you can see between the price displayed 44.945 and the calculated price 44.905 is the trading commission added to the trading spread.

CFD Trade Module

When trading CFDs that are being routed to an exchange, the CFD Trade module looks like this:

Instead of the simple Buy and Sell buttons, you now have to chose whether you want to place a market or limit order to buy or sell. You are also given options for placing orders join the current buy or sell price (sell at the current Bid price or buy at the Ask price).

Trade Order types

When CFD trades are routed to the exchange, trading is done by trade placing trade orders in the order book. You need to decide and you need to decide what type of order best fits your situation:

Market Orders (Buy @ M and Sell @ M buttons)Market orders pretty much guarantee that your full order will be filled, but not the price at which it will be filled. All being well, you will get the displayed Volume Weighted Average Price but it is also likely that the market has moved since then and the price will differ.If you want a trade that will fill at the best available price – for example, some important news about a company has been released that will affect the share price and you want in as fast as possible – use a Market Order.

Limit Orders (Buy Offer and Sell Bid)Limit orders are used when you want to trade at the displayed price displayed or better. Limit orders do not guarantee you will get a position or that your complete order will be filled. So maybe only half of an order for 10,000 shares can be filled at the price you placed the order; the remaining 5,000 will be placed in a new order at the same price and wait for the market to hit that price again.Use Limit orders when you want a specific price, for example when the price of a

stock is approaching a level of resistance and you expect a reversal in the near or immediate future. But be aware, you might not be filled.

Join Bid and Join Offer optionsThe CFD Trader module also offers buttons for joining the currently displayed Bid and Offer prices, so if the current market price at which you can buy a stock is 100, you would add your order to the order book to sell at 100. This is also done using limit orders that guarantee the price of your trade but not that you will be filled.

When using the Join Bid and Join Offer options, be aware that for the volume you are trading, the Volume Weighted Average price displayed might not be at the top of the order book but be an average of a number of levels.

All about Equity Contracts for Difference

By John L NewmanFurther Derivatives Guidance Notes >

Introduction

Futures

Traded Options

Spread Betting

Fixed-odds Betting

Equity Contracts for Difference (CFDs) are growing rapidly in popularity and, for the experienced investor, are proving an attractive means of gaining exposure to the economic performance and cash flows of individual equities without the need to invest in the physical share.

A CFD is a financial instrument linked to the underlying share price. Consequently, no rights are acquired or obligations incurred relating to the underlying share and, depending on your view of a company’s share price, you can buy (go long) or sell (go short). The ability to go short is one of the principal attractions of CFDs as other methods of going short are both expensive and inconvenient.

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The reason that both small (<£50,000 per trade) and large (>£50,000 per trade) private investors are prefering CFDs is due to following.

Ease of opening and closing positions via online trading platforms. Gearing Stamp duty exemption Ability to easily trade both ways - Short selling

For those wanting more info on CFD's including a walk through by GNI click titles below.

For those wishing to get a trading demo of GNI Online Trading Platform, Fill out the fields below and GNI will contact and set up an account for a two week trial obligation basis.

CLICK HERE to go to GNI site enquiry page.

Key Features of CFDs

CFDs are geared or leveraged instruments. This means that a deposit from as little as 10% of the value of the CFD is required. Consequently, it is possible to hold a position 10 times greater than would be possible with a traditional investment. Clearly, this degree of gearing means that for a correctly anticipated price movement

a greater profit will be generated. On the other hand, the risk of loss increases commensurately if the anticipated price movement proves to be ill founded. If the case of substantial and adverse market movements the potential exists to lose all of the money originally deposited and to remain liable to pay additional funds immediately to maintain the margin requirement.

CFDs are available on the stocks or shares of companies comprising the FTSE 350, in the UK, the S & P 500, Dow Jones and Nasdaq 100 in the USA and most of the major continental European companies.

The counterparty to the holder of a long CFD position will have had to borrow the stock in the market and in order to fully mirror the economics of physical purchase interest will charged. The margin deposit is held to secure the performance of the contract and is not available to be set-off against the Contract Value. Therefore, a long CFD holder will pay interest on the day-to-day Contract Value. Conversely, the holder of a short CFD position will receive interest also based on the day-to-day Contract Value. Interest is typically calculated at a margin above or below the relevant Inter-Bank Offered Rate for long and short positions respectively.

Other than shareholder privileges, a CFD reflects all corporate actions affecting the underlying stock or share. The net dividend declared by a company will be paid to the holder of a long CFD on the Stock Exchange ex-dividend date. This will be advantageous in cash flow terms as the dividend pay date will normally be several weeks after the ex-dividend date. Holders of short CFDs pay 100% of the gross dividend declared and this must also be paid on the ex-dividend date. These payments reflecting the dividend are made on the ex-dividend date as, all things being equal, the share would be expected to fall by the amount of the declared dividend per share. Similarly, bonus and rights issues and splits are replicated in the CFD on the corresponding 'ex-date'

Equity CFDs offer a number of investment opportunities and strategies, some of which are unattainable in traditional share investing. They can be summarised as: -

o An alternative to traditional share trading

o Providing economic exposure to a company’s share performance without taking or making physical delivery

o Counterbalancing economic exposure on an existing physical share holding, i.e. as a hedging or risk management tool

o Affording access to a wide geographical range of markets and exchanges

o No Stamp Duty is payable

o Delivering a geared return on the capital employed

o Freeing-up capital not required for margin for other uses

o Allowing you to close-out a position at any time

o Potentially positive daily cash flows

Some Questions and Answers

Q1. What is an Equity Contract for Difference?

A. An Equity Contract for Difference is an agreement (made between two parties) to exchange, at the closing of the contract, the difference between the opening and closing prices, multiplied by the number of shares detailed in the contract.

Q2. What is the Contract Value?

A. Every CFD has a Contract Value. It is the number of shares in the contract multiplied by the price of the underlying share. The Contract Value will change in line with the changes in the price of the underlying share. A CFD is marked-to-market (i.e. valued) daily at the close of business mid-price of the underlying share.

Q3. Do I have to pay the full Contract Value of an Equity CFD?

A. No, an Equity CFD is a Margined Transaction.

Q4. What is a Margined Transaction?

A. A Margined Transaction is a transaction where the deposit of cash or other acceptable security (the Margin) is required to secure the performance of the obligations under the contract

Q5. What Margin is required for an Equity CFD?

A. CFDs can be traded by providing Margin from 10% of the Contract Value. For example, if you want to open a CFD with a Contract Value of £25,000 you will be required to deposit £2,500. (If you are trading in an overseas market or one that has a history of price volatility the Margin required may be higher). The margin required may fluctuate from day-to-day in line with changes in the close of business price of the underlying share.

Q6. Can I buy or sell an Equity CFD?

A. Yes. You can buy (go ‘long’) a CFD and will make a profit if the value of the CFD increases.

Conversely, if you sell (go ‘short’) a CFD you will make a profit if the value of the CFD decreases.

The ease with which a short position can be established with a CFD is one of major attractions. It can be done without incurring the costs involved in dealing on a 'T+20' basis, i.e. there are no commission charged or Stamp Duty incurred in rolling positions forward. Consequently, CFDs provide an easy way to take advantage of a negative view on a share.

The examples below illustrate the features of long and short trades and compare them to traditional equity investments.

Q7. Why and how frequently is interest charged or credited?

A. When going long a CFD the economic aspects of a conventional share purchase are replicated. Accordingly, interest, calculated on a daily basis, on the Contract Value will arise.

On the other hand, with a short CFD position, a conventional share sale is simulated and interest, also calculated on a daily basis, will be earned.

Whether you are long or short the interest calculation is based on the day-to-day Contract

Value is usually applied to the account weekly in arrears.

Interest is typically calculated at a margin above or below the relevant Inter-Bank Offered Rate for long and short positions respectively. The applicable rates will be notified in writing on opening the account.

Q8. What happens when a company pays a dividend?

A. The holder of a long CFD will receive, on the ex-dividend date, a payment that equates to the net dividend (i.e. having deducted UK basic rate tax) on the underlying share. This payment will be credited to the account.

A short CFD holder will, on the ex-dividend date be charged the gross dividend by way of a debit to the account.

Q9. Will I have to pay Stamp Duty when buying an Equity CFD?

No. As no purchase of the underlying shares is involved no Stamp Duty (currently 0.5% of the Contract Value) is payable.

Q10. Will I have to pay commission?

A. Commission is payable on the opening and closing of a CFD. Typically, the charge for each leg is 0.25% of the Contract Value. However, there are brokers that offer commission free dealing. They are able to make this offer by making their own, wider bid/offer spread around the price of the underlying stock or share.

Q11. What Spread can I expect to see in the bid and offer prices?

A. If commission is payable the CFD bid and offer prices should be the same or lie very close to the cash prices of the underlying share, as quoted in the relevant stock market.

Q12. What stocks are available?

A. It is possible to trade in any stock or share that forms part of the FTSE 350 listing, the S&P 500, Dow Jones and Nasdaq 100 and those traded on most of the European stock exchanges. In addition, most brokers will seek to quote CFD prices for other company’s shares, if the company’s market capitalisation is greater than £50 millions.

Q13. How often can I trade?

A. Provide an account is sufficiently funded it is permissible trade as frequently as desired. Trading will normally only be possible during the hours that the relevant stock market is open.

Q14. What is the minimum account-opening requirement?

A. £10,000 (or other currency equivalent) is generally the minimum amount required.

Q15. Is there a minimum opening Contract Value?

A. For CFDs based on FTSE100 shares the minimum is likely to be £10,000. A higher minimum contract value will often be applicable for lesser-known or some overseas shares or if the company has a modest market capitalisation.

Q16. Is there maximum opening Contract Value?

A. Only the cash in your account available to meet the Margin requirement and the ability of the broker to ‘borrow’ the underlying shares limits the maximum Contract Value.

Q17. How do I place an order for an Equity CFD?

A. You place an order for a CFD as if it were an ordinary share purchase or sale. As all trades are cash settled no instruction will be accepted unless there are sufficient cleared funds in the account or a credit facility has been pre-agreed by your broker.

Q18. Can I ask my stockbroker or someone else to place orders on my behalf?

A. This is normally possible, but will be subject to the completion of a ‘third party’ mandate by you and your stockbroker or the other party.

Q19. What trading strategies are commonly adopted?

A. Going long: - This is the simplest and most straightforward strategy. A long CFD will profit from an upward price movement in the underlying and has the benefit that no Stamp Duty is payable. There is no limit for the holding of a long position but, as explained below, there comes a point in time where a long CFD may become uneconomic.

Going short: - Also a simple and straightforward strategy and one of the principal attractions of CFD trading. By entering into a short CFD position a profit will be seen if the price of the underlying falls. Such a position can be maintained indefinitely without the need or the associated costs of having to continually roll the position over. Additionally, short positions generate an interest income but dividends are paid gross.

Hedging: - It is possible to offset an existing stock position so as to reduce market risk particularly in terms of a different time horizon to an underlying position. In other words, a trader may want to reduce exposure temporarily to a company but without effecting a sale of the physical holding.

Pairs trading: - While reducing overall market risk it is possible to obtain the out-performance of one share versus another by going long a CFD while going short a CFD, with a matching Contract Value, in a similar stock e.g. HSBC and Lloyds TSB. Examples are set out below.

Taxation: - There may be taxation reasons why a shareholder cannot or prefers not to sell a stock. CFDs are able to reduce short-term exposure by taking an offsetting position.

Changes in the Constituent Companies of an Index: - It is possible to take advantage of changes in the constituents of an index and the price volatility often seen by anticipating new entrants or departing companies from an Index.

Dealings by Directors & Other News: - A share price may move on news of directors buying or selling and these moves present opportunities that can be utilised with CFDs. Similarly, new information about a company, i.e. acquisition or merger situations, or its trading may generate price movements.

Speculative short-term trading: - Advantage can be taken quickly and inexpensively (in terms of trading costs) of individual views of a company’s likely share price movement.

 

Q20. Can I take or make delivery of a stock by trading an Equity CFD?

A. No. A CFD is a financial instrument linked to the underlying share price. You will not acquire any rights or incur any obligations relating to the underlying share.

Q21. How does an Equity CFD investment perform in comparison with a conventional share transaction?

A. A CFD is designed to mirror the economic performance and cash flows of physical share trading.

Q22. How does trading an Equity CFD compare with a conventional transaction?

A. This is best illustrated by examples below.

 

Q23. Is there a point in time when it becomes uneconomic to trade a long Equity CFD compared with a traditional investment?

A. Most CFD trading revolves around short-term trading so any comparison is best made by comparing the savings achieved by not incurring Stamp Duty with the financing cost of a long CFD. For ease of illustration, all commission costs are ignored and effective interest rate is taken as 6.5% (say LIBOR at 4% plus a 2.5% margin).

The additional cost of holding a long CFD position over a traditional purchase is only the interest cost. The interest charged on a long CFD is 6.5% of the Contract Value. The 10% lodged by way of margin is held to secure the performance of the contract and in not available to be set-off against the Contract Value. Conversely, a traditional share purchase incurs Stamp Duty at 0.5%. The crossover will occur at the time that the interest charged on the long CFD match the saving made on Stamp Duty. This point is reached in 28 days – ((0.5/1.0) x (365/6.5)). However, this needs adjusting to allow for the fact that the Stamp Duty on the traditional purchase will be payable 3 days after the bargain date. Accordingly, the crossover occurs on day 25. Consequently, for trades outstanding for less than 25 days it is economically more viable to trade the CFD rather than the underlying stock. The crossover point will occur earlier if interest rates rise above the 6.5% used in the example and be later in the event of a reduction in the interest rate. This is, of course, a basic calculation as there are other costs but for short-term or intra-day trading (and in the latter case there are no interest costs) the argument is undeniable.

Q24. How do I go about opening an account?

A. If you have an existing account to trade futures and options you should expect to have to sign a CFD supplement to the original Terms of Business. If you are new to CFD trading, you will be required to demonstrate prior experience of conventional share trading.

All brokers are required by the Financial Services Authority to satisfy themselves that the account holder understands the risks inherent in the leveraged or geared nature of CFDs.

Trading CFDs on margin is towards the higher end of the investment risk spectrum and it is possible to lose more than the amount originally invested. CFD trading is not suitable for everyone and if in any doubt, consult an independent financial advisor.

COMPARATIVE SHORT EQUITY CFD and CONVENTIONAL EQUITY SHORT SALE INVESTMENT

Customer ‘A’ and ‘B’ each have £20,000 to invest.

Customer ‘A’ short sells National Grid shares at £5 each through his stockbroker who allows him 2.5 times his £20,000 with settlement to be made every 25 days. He pays commission at 1% and has to roll the position every 25 days. Stamp Duty of 0.5% of the consideration and commission (1%) is incurred each time the trade is rolled forward.

Customer ‘B’ deposits his £20,000 with his futures broker and uses £10,000 of this as Initial Margin to sell (go short) a CFD for 10,000 National Grid shares at £5 each.

Both customers close their positions after 60 days with National Grid shares then priced at £4 each. LIBOR is constant at 6% throughout the 60 days.

 

   

CUSTOMER ‘A’ Conventional Equity Investment

 

CUSTOMER ‘B’ Equity CFD Purchase

 

Customer deposits his £20,000 with his stockbroker £20,000 £10,000 Customer deposits £10,000 of his £20,000 with his futures broker

Customer short sells £50,000 (£20,000 x 2.5) worth (10,000 shares) of National Grid shares at £5 each

 

£50,000£50,000 Customer sells (goes short) a CFD for 10,000 National

Grid shares at £5 each

Commission at 1% of the sale consideration (£50,000) £500 £125 Commission at 0.25% of the contract value (£50,000)

Total Cost of establishing the Short Sale

 

£50,500£50,125 Total Costs of establishing the short CFD

Customer rolls his short sale forward on days 25 and 50. On each occasion he incurs commission at 1% (average contract value assumed at £45,000) on each purchase and sale legs and 1% of £40,000 on closing out and

Stamp Duty at 0.5% on each of the purchase legs.

 

£1,800

£400

£450

 

 

£100

Nil

The CFD does not have to be rolled.

 

Commission on closing at 0.25% of £40,000

No Stamp Duty is incurred

Interest income Nil £259 Interest income – assumed average contract value over the 60 days term of the CFD of £45,000 at LIBOR (6%) less 2.5%

Cost of purchase of 10,000 National Grid shares at £4 each

£40,000 £40,000 Closing value of CFD for 10,000 National Grid shares at £4

Gross Profit (£50,000 less £40,000)

 

£10,000£10,000 Gross Profit (£50,000 less £40,000)

Less: - Opening commission costs (see above) £(500) £(75) Less: - Opening commission (see above)

Less: - Commissions on rolling & closing forward £(2,200) £(100) Less: - Closing commission (see above)

Less: - Stamp Duty £(450) Nil Less: - Stamp Duty

Add: - Interest income Nil £259 Add: - Interest Costs (see above)

Net Proceeds of Purchase & Sale Transactions £6,850 £10,084 Net Proceeds of CFD Purchase & Sale Transactions

Return on sum invested (£6,850/£20,000) 34.2% 100.8% Return on sum invested (£10,084/£10,000)

(All figures rounded to the nearest £1)

COMPARATIVE LONG EQUITY CFD and CONVENTIONAL BUY EQUITY INVESTMENT

Customer ‘A’ and ‘B’ each have £25,000 to invest.

Customer ‘A’ invests his £25,000 in 5,000 BAA shares at £5 each through his stockbroker. He incurs commission costs of 1% and Stamp Duty of 0.5%, each calculated on the total cost.

Customer ‘B’ deposits £5,000 (20% of the total purchase price) of his £25,000 with his futures broker and buys 5,000 BAA shares at £5 each using an Equity Contract for Difference (CFD).

One week after making their purchases BAA pays a dividend (net of tax at 10%) of 10p per share. Both customers sell after one month with BAA shares at £6.

 

   

CUSTOMER ‘A’ Conventional Equity Investment

 

CUSTOMER ‘B’ Equity CFD Purchase

 

Cost of 5,000 BAA shares at £5 per share, exclusive of commission and Stamp Duty

£25,000 £25,000 Contract Value of CFD for 5,000 BAA shares at £5 each

   £5,000 Initial Margin deposit (20%) required (which is repaid

on closing) to secure purchase of 5,000 BAA shares at £5 each using a CFD

Commission at 1% of the purchase consideration (£25,000)

£250 £62 Commission at 0.25% (min. £25) of the contract value (£25,000)

Stamp Duty at 0.5% of the purchase consideration £125 - No Stamp Duty is payable on purchasing a CFD

Total Costs of Purchasing Shares £25,375 £5,062 Total ‘Costs’ of Purchasing CFD

Dividend received at 10p/share (net of tax)

(5,000 x 10p)£500 £500

Dividend received at 10p/share (net of tax)

(5,000 x 10p)

Interest costs – no interest costs are incurred - £198 Interest costs – assumed average contract value over the one month term of the CFD of £27,500 at LIBOR (6%) plus 2.5%

Proceeds of sale of 5,000 BAA shares at £6 each £30,000 £30,000 Value of CFD for 5,000 BAA shares at £6 each

Gross Profit (£30,000 less £25,000) £5,000 £5,000 Gross Profit (£30,000 less £25,000)

Less: - Commission at 1% of sale consideration £(300) £(75) Less: - Commission at 0.25% of the sale consideration

Less: - Commission at 1% of purchase consideration £(250) £(62) Less: - Commission at 0.25% of the purchase consideration

Less: - Interest Costs (see above) - £(198) Less: - Interest Costs (see above)

Add: - Dividend received (net of tax) £500 £500 Add: - Dividend received (net of tax)

Net Proceeds of Purchase & Sale Transactions £4,950 £5,165 Net Proceeds of CFD Purchase & Sale Transactions

Return on sum invested (£4,950/£25,000) 19.8% 103.3% Return on sum invested (£5,165/£5,000)

(All figures rounded to the nearest £1)

 

CFD Pairs Trading Examples

By trading a CFD Pair, it is possible to establish a balanced position while retaining sensitivity to market price movements.

CFD Pairs trading involves going long a CFD in one company’s shares with the contemporaneous shorting a CFD in another company’s shares. Both contracts should have the same contract value. The two companies

will have a high interdependence, e.g. be in the same market sector.

The performance of a CFD Pairs trade is easily measured in terms of the ratio of the share prices. An increase from the original ratio will indicate a profit whilst a reduction in the ratio will indicate a losing trade.

For ease of illustration, the outcome of the trades in each of these scenarios is before taking account of interest (whether charged or earned) and trading commissions.

Example:

An investor anticipates that the share price of HSBC Bank will outperform that of Lloyds TSB and

1. Buys a CFD for 10,000 HSBC shares at 900p (contract value £90,000) 2. Sells a CFD for 15,000 shares in Lloyds TSB at 600p (contract value £90,000)

The price ratio is 900/600 = 1.500

The opening margin required for this pairs trade would be £18,000 (10% of the aggregate Contract Values).

Scenario 1

The price of HSBC rises to 930p and Lloyds TSB rises to 609p.

The price ratio is then 930/609 = 1.527

If the two CFDs were closed at these prices, the result, in monetary terms, would be:

Profit on HSBC trade £3,000 (10,000 shares x (930-900))

Loss on Lloyds TSB trade £(1,350) (15,000 shares x (600-609))

Net Profit on the trade £1,650

 

Scenario 2

The price of HSBC rises to 910p and Lloyds TSB rises to 640p.

The price ratio is then 910/640 = 1.422

If the two CFDs were closed at these prices, the result, in monetary terms, would be:

Profit on HSBC trade £1,000 (10,000 shares x (910-900))

Loss on Lloyds TSB trade £(6,000) (15,000 shares x (600-640))

Net Loss on the trade £(5,000)

 

Scenario 3

The price of HSBC falls to 850p while Lloyds TSB falls to 585p.

The price ratio is then 850/585 = 1.453

If the two CFDs were closed at these prices, the result, in monetary terms, would be:

Loss on HSBC trade £(5,000) (10,000 shares x (850-900))

Profit on Lloyds TSB trade £2,250 (15,000 shares x (600-585))

Net Loss on the trade £(2,750)

 

Scenario 4

The price of HSBC falls to 870p and Lloyds TSB falls to 535p.

The price ratio is then 870/535 = 1.626

If the two CFDs were closed at these prices, the result, in monetary terms, would be:

Loss on HSBC trade £3,000 (10,000 shares x (870-900))

Profit on Lloyds TSB trade £9,750 (15,000 shares x (600-535))

Net Profit on the trade £6,750

 

Scenario 5

The price of HSBC rises to 910p and Lloyds TSB falls to 535p.

The price ratio is then 910/535 = 1.701

If the two CFDs were closed at these prices, the result, in monetary terms, would be:

Profit on HSBC trade £1,000 (10,000 shares x (910-900))

Profit on Lloyds TSB trade £9,750 (15,000 shares x (600-535))

Net Profit on the trade £10,750

 

Scenario 6

The price of HSBC falls to 880p and Lloyds TSB rises to 635p.

The price ratio is then 880/635 = 1.386

If the two CFDs were closed at these prices, the result, in monetary terms, would be:

Loss on HSBC trade £(2,000) (10,000 shares x (880-900))

Loss on Lloyds TSB trade £(5,250) (15,000 shares x (635-600))

Net Loss on the trade £(7,250)

 

John L Newman is Head of Business Development at Sucden (UK) Limited, who are regulated by the FSA.

Tel: 020 7940 9400 Fax: 020 7940 9500 Email jnewman@sucden.co.uk

Web: www.sucden.co.uk

What are CFDs?

Contracts for Difference

CFD’s (Contracts for Difference) are becoming the latest hot product on the share scene. This part of the site is designed to give you a basic understanding of CFD’s and the tools to find out more about them.

Just like any investment, there are risks involved so be sure to learn as much as you can before taking the leap into CFD’s.Many CFD providers offer educational courses on CFD trading ranging from free introductory courses to comprehensive CFD training. Check out the ShareChat seminars page to view any courses scheduled over the next few months.

In our CFD Information section, you can read articles and inspiring profiles on real-life CFD traders. You’ll also find a selection of useful books written by CFD traders sharing their experiences and wisdom on the subject.

What are CFDs?

CFD is the abbreviated term for a contract for difference. A CFD is a contract between two parties to exchange the difference between the entry and exit price of a financial instrument.

CFD traders can invest on domestic and global shares as well as foreign exchange, indices and commodities.

Because CFD’s are derivatives, you never own the physical share or commodity, instead you either profit (or make a loss) on the underlying share price movement as the CFD mirrors the price of the underlying security. As a result of never actually owning the security, you are not entitled to any voting rights.

As well as buying a CFD (going long) with the view that it may rise, you can also sell a CFD (going short) that you do not own, with the view that it may fall.

CFDs are as simple as shares to trade. They trade at the same price so calculating profits and losses is identical to shares. The major difference is that you buy a CFD with borrowed money. Providers let you leverage on a CFD trade so they are traded on margin. Generally 5 to 10% of the securities value is required and the remainder can be borrowed.

Money and risk management are two skills you will need to master. You will also need to carefully manage your interest costs, losses and margin calls to ensure these do not rise above your original deposit.

To reduce your risk it is strongly recommended that you use stop-losses when trading CFD’s. These are orders, set at a pre-determined price at the beginning of the trade, that will trigger a sell when the CFD passes through this set price. It limits the extent of your losses to some degree.

Also see:What are CFDs?Where to startShares vs CFDsQuestions to ask your CFD providerA day in the life of a CFD traderCFD Information

ShareChat has provided the CFD section as general information, not professional investment advice. Derivatives may not be suitable for all investors/traders; so ensure you fully understand the risks involved, and seek independent advice if necessary.

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CFDs: Where to start

CFDs: Where to start

If you’ve decided to give CFD trading a go, then we’ve outlined some handy steps to consider:

Finding a CFD providerImportant features to consider will be the commissions charged on entry and exit into a CFD trade, daily interest charges, margins offered and any monthly fees.

Opening an AccountMost CFD providers will send you an information pack or alternatively check out their websites as quite often you can open an account online. Some providers also have a minimum amount required to open your account.

Getting StartedOnce your account has been approved, take your time to familiarse yourself with the trading platform. Most systems allow you to back-test or undertake a series of dummy trades until you

are confident to move on.

EducationLastly, and most importantly, your provider should be able to offer you continuing education and courses on CFD trading.

Shares vs CFDs

A comparison of a CFD and a Share trade

The major difference between CFD and shares is that CFD’s are bought using leverage. This means that you can gain a larger exposure to the movement of the share for a relatively small outlay.Keep in mind however, that leverage will magnify a profit, or a loss, so it does carry significant risk.

  CFDs Shares

10,000 shares buy at $3.00

$30,000 $30,000

Initial outlay required      $300 $30,000

10,000 shares sold at $3.20

$32,000 $32,000

Gross Profit/Loss: $  2,000 $  2,000

Return on Investment 666% 6.66%

Note: To simplify the scenario we have not included any fees, interest or dividend adjustments. These will vary between providers.

Questions to ask your CFD provider

Questions to ask your CFD provider

Catherine Davey outlines the questions to aks your CFD provider in her book, Contracts for Difference. In her book, Catherine also explains the background to CFDs, how CFDs are traded, she compares CFDs to shares, options, warrants and futures and looks at analysis techniques using charts. This book is filled with information for every trader.

Contracts for DifferenceMaster the Trading RevolutionBy Catherine Davey

QUESTIONS TO ASK YOUR CFD PROVIDER

The CFD market, especially in New Zealand, is relatively new for retail traders. Despite many

traders having years of derivative trading experience, a lot of new CFD traders have a very rudimentary understanding of the product before they sign up with a provider. Therefore, there are some important questions that can affect your bottom line, which every potential client should ask.

What spread do you charge?While brokerage is an obvious charge, the spread can also add expense to the trading process. The wider the spread, the more it will cost you to transact a trade. Ideally the spread should imitate the spread quoted on the exchange on which the CFD is based. If it is wider than the exchange spread, then the CFD provider has built a transaction cost into the prices. It is not common practise for CFD providers to charge a spread on CFDs, however spread betting, which is commonly and mistakenly compared to CFDs, is characterised by wide spreads.

For example, let’s say the stock exchange is quoting stock XYZ at $10.00 to buy and $10.02 to sell.

CFD Provider No.1 quotes the same rate. CFD/spread bet provider No.2 quotes a bid price of $9.95 and an offer price of $10.07, This effectively means for every share CFD you buy, you will pay an extra 5 per share. On a position of 1,000 shares this would add up to an extra cost of $50 and on a 10,000 position that would be a $500 extra charge. This is where the CFD/ spread bet provider will earn extra income from your business.

What are your commission rates?Some CFD providers charge higher commission than others. The rates may vary from 0.1 per cent to as much as 0.4 per cent, based on the underlying value of the position. Often the CFD provider who charges commission will prescribe a minimum deal size. This means they can guarantee a certain level of commission per trade. In such cases, $40 may be the minimum brokerage payable.

For example, if you wished to buy $10,000 worth of share CFDs on stock XYZ: the CFD provider charges 0.4 per cent on the trade, which means it costs you:10,000 x 0.004 = $40

Can I trade online?Online trading is now extremely popular, and the preferred method of execution for many traders. A good online trading system should provide live prices, live charting, and news. Take advantage of any trial software offer to test for user-friendliness, charting and news features, the ability to leave orders, position keeping and live profit and loss update, as well as speed of execution. A 24-hour dealing platform should also be accompanied by an efficient 24-hour technical support desk. It is also worth asking your CFD provider how long the company has been offering its dealing platform to ensure it has proven reliability.

What are your financing rates?These should be fixed to an official rate such as the overnight cash rate of the country in which the underlying stock exchange operates. For example, the rate is generally set around the Reserve Bank overnight rate, with an additional 1 to 2% for buying and subtracting the same amount for selling. This impacts the daily cost or benefit of holding a position and it is worthwhile comparing the borrowing and lending rates from your CFD provider.

How does a margin call work?Before you start trading, it is important to understand the margin call process. A margin call will occur if the money in your account falls to a level below the prescribed rate for the combination of the positions in your account and the losses against it. This will help you avoid any awkward situations where you are unable to meet a margin call in a timely manner and the CFD provider is forced to close out your position. The margin call level will differ between CFD providers. Some CFD providers with online dealing platforms also have an automatic real-time margining system. This can keep you continually abreast of the impact of price development on your margin requirements.

Contracts for Difference ($33.95) is available through the Good Returns Bookstore or call 0800 345 675

A day in the life of a CFD trader

A day in the life of a CFD trader

This is a day in Catherine Davey’s trading diary from her latest book, Making Money from CFD Trading. These entries not only describe the reasoning behind and execution of her trading strategies, but also present an honest, inspiring and often humourous discussion of her emotional journey as a trader.

Making Money from CFD TradingHow I turned $13,000 into $30,000 in three monthsBy Catherine Davey

Day 19Friday, 22 JulyTotal: $13794Excel Coal (EXL) gaps on the open and races higher again. My position of 4500 looks too good to be true, which is usually a sure sign I should be taking a profit. I see it trade above $8.40 very quickly, a move of over 200 above yesterday’s close, and I immediately move my stops in tight. I place a stop-loss order for 3000 at $8.29, because the only place the price paused on a swift move to $8.48 was at $8.30. I watch it as it pulls back and hovers around $8.40. I contemplate exiting, but soon enough it’s down again, gapping from $8.40 to $8.35, then a few ticks to $8.30. Once the 3000 are out at my $8.29 stop-loss, I walk away to get a drink. I come back and the stock is trading in the $7.80 range. Luckily I had a stop for the remaining 1500 at $7.97. I’d forgotten about it, because I hadn’t expected the price to fall to that level. This good fortune—a positive mistake on my account—is perhaps a result of being in the zone.

It comes all the way back to $7.30, just above the original double bottom highs of $7.24, the price at which I started buying. I check the chart history for similar big moves higher followed by large corrections. These kinds of events are usually followed by a few more days of volatility and are not that easy to trade. I decide not to push my luck and don’t re-enter. I book a total profit on the scaled-in position of $3763. If I’d stuck to my original position and hadn’t added to it, my total profit would have been just $1155.

I end the week with a third attempt to add to my Newcrest (NCM) position. Unlike the other two, it doesn’t get stopped out. At the close, the original position is up 16c and my second addition is 2c in the money. I might finally have found the right entry level. I also buy Oxiana (OXR) today at 93c. I’ve always liked this stock and it’s a cheap and a less volatile opportunity to get gold exposure.

Pick up any self development book and you will invariably come across the story of the guy who failed and continued to fail until one day he got lucky and then became phenomenally successfully. They say the difference between a successful person and one who lives a life of mediocrity or failure is the ability to get over loss and rejection and start again. Becoming a successful trader involves frequent trips down that street. In a normal career, you face loss relatively rarely, but as a trader, loss is a regular and unavoidable fact of life. How you deal with loss will decide whether you survive and thrive or give up in despair.

When I first entered my losing phase I knew in theory that trading is cyclical, and that I would enter a new winning phase sooner or later.

In reality, though, I was fearful that I would not be open to the good times to come—the losses had been so consistent that losing money was starting to feel normal. After my visit with the trading coach last week and a couple of sessions of hypnotherapy, I felt that things were turning around, even though my account hadn’t made any progress. Until you start trading, you can’t realise the emotional importance of the experience. If you are trading and regularly losing money, and blaming this on your chosen system, it might be time to explore the losses, looking for an underlying emotional element that you may be reluctant to face. If it’s significant, I guarantee you won’t succeed until you’ve taken steps to deal with it.

The story so far:Profit/Loss to date—$794 profitThis week:Closed Trades— 16; Open positions— 14Winners —8; Losers —8; Win/loss ratio —0.50Biggest Loss —$526; Biggest win —$1532Number of consecutive losing trades—3

This time last week my account was down over $4000. My account balance is now in the black for the first time since I started writing this book. Win/loss ratio not much improved, but there is a big difference in the size of my winning trades. I booked four trades with profits over $500 and two trades with profits over $1000.

What have I learnt?I pat myself on the back for persistence. NCM was a good example. I kept trying to add, but getting stopped out. I stuck with it. My third attempt has been the most profitable so far. I don’t know how it will end up, but I like the fact I am not running scared when I get it wrong. Most traders give up on a stock too quickly when they get early trades wrong.

The winning cycle always returns, but the trick is to survive in the meantime. I lost a lot of confidence waiting for my losing streak to turn around, but with some sensible advice and mental ‘reprogramming’, I was able to prepare myself emotionally to make money again.

Do’s and don’ts• Do keep abreast of the general index. This will tell you if you are trading with or against broader market sentiment.• Increase your appetite for risk when you are already trading well. If a position is already in profit, adding to it is more likely to pay off. The middle and later stages of a trend are where the largest and fastest gains can be made.

Making Money in CFD Trading ($33.95) is available through the Good Returns Bookstore or call 0800 345 675

CFD Information

More information on CFDs:

Articles:CMC Markets have kindly allowed us to reproduce a selection of useful articles from their comprehensive education section.

- Getting started trading CFDsBenefits of Trading CFDs

- CFD Trader BiosJustine Pollard - CFD trading using stop loss orders

-CFD EducationPyschology of successful trading - know you can do it

You can subscribe to the CMC Education Centre (which is free) by clicking here. The education centre is where you can download useful articles on CFDs including CFD trader bios, education on getting started, some simple strategies and video tutorials (how to trade, place orders, go short etc).

CFD Books:

Contracts for Difference Making Money from CFD Trading [More books on trading can be found at the Good Returns Bookstore or call 0800 345 675]

Links to CFD Providers:

CMC Marketshttp://www.cmcmarkets.co.nzOMFinancial Ltdhttp://www.omf.co.nzTricom NZhttp://www.tricom.com.au

Also see:What are CFDs?Where to startShares vs CFDsQuestions to ask your CFD providerA day in the life of a CFD traderCFD Information

ShareChat has provided the CFD section as general information, not professional investment advice. Derivatives may not be suitable for all investors/traders; so ensure you fully understand the risks involved, and seek independent advice if necessary.

share chat home

Making Money from CFD Trading$30.18 ex GST $33.95 inc GST

How I turned $13k into $30k in three months

by Catherine Davey

Contracts for difference or 'CFDs" have taken Australian traders by storm. Catherine Davey's first book, Contracts for Difference: Master the Trading Revolution, was a great success; in this follow-up, she shares her real-life CFD trading experiences over a three-month period in 2005. During this time, she manages to turn $13 000 into $30 000, but her path to success is anything but straight and simple.

Making Money from CFD Trading describes not only the reasoning behind and execution of her trading strategies, but also presents an honest, inspiring and often humourous discussion of her emotional journey as a trader.

Catherine gives a fascinating insight into the trading experience; struggling to maintain the right psychology, avoiding irrational 'ego trades' and finding emotional balance between depressing losses and big wins. She presents a range of opinions from industry experts and commentators, discussing day-to-day trading issues and sharing controversial market views.

This book will give you an understanding of:

* simple charting techniques that make money* the unique aspects of trading CFDs* how to exploit the advantages CFD trading has over traditional share trading* strategies for establishing and maintaining a winning mental approach.

A "must-read" for those wanting to know more about CFDs and for traders of any financial instrument who want to take their performance to the next level.

This product was added to our catalog on Tuesday 28 February, 2006.

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