Business and Finance Analysis

Posts Tagged ‘Contract for Difference’

In the last season due to the pile of work I have found virtually no physical time to devote to daily speculation in CFDs so let’s say that I have virtually abandoned this part of my strategy to generate capital. This has made me consider the possibility of converting my investment strategy that requires a lot less time but that takes advantage of CFDs.

Many of you do not dare to get their hands on CFDs simply because you see them complex, do not understand, you are not willing to take risks that lead to or simply can not withstand the pressure of daily purchases and sales. It’s the right thing not operate in these cases because the results would be satisfactory. Well, putting that aside, one of the biggest advantages of CFDs as has been mentioned more than once is the power of leverage, ie we can participate in the movement of various financial products just have to put in our pocket a of the money they actually move in the market, everything else us “borrow” the broker. My current approach is to try to analyze whether this advantage of leverage and operation if CFD could be used to make a long-term strategy of profitable and efficient.

For this I chose the first strategy of long-term operation with simple but proven statistical results over time: The magic of the investment rule . I will not explain it again (you can read the article), but briefly buys 2 large and good a month they are offering and holds it one year, then last year we have about 24 companies will go again gradually replaced by new ones at the moment are on sale. Provided we keep this strategy at least 3 years we get returns close to 30% per annum on average.

My idea would cripple the list 1 time every 2 weeks and she choose a company and open a long position in CFDs it with a certain amount that will keep exactly 1 year. For example with 1000 euros. Every two weeks I go back to choose another company and do the same. After a long year I have 24 positions of 24 different companies with a value of movement in the market for about 24,000 euros (if I ever bought about 1000). The funny thing is they do not really need to save in a year to invest 24,000 euros (not everyone can save in a year so exorbitant that figure), do not even need 1000 euros every 2 weeks. I’ve never gotten to have that money, as the broker opens my position have only 25% of the value (depends on broker) of her background (there leverage). That is only 250 euros every 2 weeks I can have about 1000 eruos market participants of a given company increases. Save around 500 euros a month and is more normal for a family with expenses and that would allow them to add about 2000 euros to its portfolio of investments for the future.

A reader wrote us an email with several questions about CFDs . As the email I found interesting, I asked permission to publish a post with them so that together solve their questions. Please anyone who can to their opinion. Also, if you more questions you can post a reference for all questions about CFDs that have:

“I read a lot about the workings of the CFDS both on your page as in others, and I think I am wrong because it would have a monthly ingrsos € 15,000 with an investment of 3,000 € to which there are 3 options:

I am a God-O
“Or the rest do not realize the opportunities arising from such
“Or is there some kind of” hidden “costs that escapes me (which is the most probable)

I would like to tell me how to do the math and I would like to tell me where I’m failing, because honestly I have panic to fail, I’ll explain: an amount to invest, meaning an amount that will not be needing short or medium term, say € 3,000

As CFDS investment in shares will usually require 5% do the calculation (3.000 / 5) x 100 = 60,000 €

€ 60,000 would have “dummy” to use for example in Inditex (whose actions follow its progress from 3 years ago)

60000/29.20 € = 2053 CFDs on shares of Inditex

Assuming that the price varies € 0.40 on the day we would get € 821 of which would have to pay an amount close to 1% and 18% broker to finance around April.

If CFDs on indices would be the same, except that the guarantee would be 2% (in X-Trade Brokers)

Example cfds buy the ibex, (3000 / 2) x100 = 150,000 €, 150.000/8361.9 = 17.93, 17 CFDSx25.30 (change from yesterday’s day) = 430.1 €

1 – What Am I wrong in something or I can collect in a month what is now charging in a year?
2 – When you give the broker an order to sell it is performed instantly or may remain an open position the next day for lack of buyers?
3 – and final tax you are not covered with this type of system?

There are also some disadvantages that can and should be bypassed …

• CFDs are designed for very short-term speculation, which, one should keep open operations more than a few hours or days. The cfd broker will charge us interest on the money we have in motion for each day that passes with the open operation, because in the end, he is giving us all the missing money to the amount of the transaction. Costs are around 6% per annum divided by 365 days and the number of days to relocate to the open operation. If an operation opens and closes on the same day there is no commission. Example: I buy a complete IBEX 35 would cost around 12,000 euros, as I have only have 120 euros in the account, the broker is making me 11,880 euros. Well if I keep the operation open 3 days, I discounted every day 12,000 -> 6% = 720 euro divided by 365 days = 1.97 euros a day to charge us for having the open operation.

• Having a big leverage carries a risk if we do not control huge, because in a small market move against us in a transaction valued at 100,000 euros, 1000 that it could lose all our capital to invest. So here more than ever for money management is super important. That nobody would play occur risking more than 1% of their capital. If you open a transaction of € 10,000 and you only have 1000 in the account, close the transaction as soon as those $ 10,000 have lost 10 and assume the losses.

• We must have great patience, time and nerves of steel to be playing before watching the monitor and graphics courses change per second in real time, not everyone can withstand much stress. Even the money in the account varies while all of our open trades.
• If we look behind the scenes, in fact, when we buy or sell a CFD as it is, the broker buys or sells in the normal market financial product in real time, thereby giving equal on what the product then it is already insured against what might happen. Of course, if the market moves against us, the broker will close our operation automatically and without our permission at the time that our losses are equal to the total of our bill (our highest margin possible.) (Something that should never happen if we put the stop loss right). The broker of course has also cut the spread (difference between purchase price and sales), with which he is concerned that we operate much he earns more. In certain products such as the spread rate is fixed and located at two points. That is, always buy 1 point above the current price and always sells 1 point below the current price.

The contract for difference (in English Contract for difference, CFDs) is a contract that is exchanged by the difference in the price of a financial instrument at the time of signing the contract and the price at the time of closing.
It was created years ago by the hedge funds to have access to trading operations with great leverage . It is a product that has been offered belatedly to the small investor, and that Spain has only begun to market since 2007. However in the UK, where the CFD for private clients and have been operating for several years, are widespread.
These data are worth referring to the London Stock Exchange in 2008 as illustration:
The hiring of CFD has grown in recent years by 57% annually.
35% of current total employment London Stock Exchange has its origin in CFD contracts, being the star of a small investor 20% of CFD transactions.
The CFD mirrors the performance of the asset, eg stocks , commodities, indices, currencies or interest rates, among others, without the need for physical property of the underlying instrument itself. CFDs are OTC derivatives (over the counter), that is not listed on an organized market. Originally, the CFD were accessible only to institutional investors. Today, CFD has become a bargaining tool popular among small investors around the world. The CFD is gaining on traditional investment due to its advantages, flexibility to operate and easy access to markets not traditionally accessible to the retail customer. CFDs require the deposit by the investor of a small amount in guarantees, this allows more efficient management of its capital, as it only mobilizes a small proportion of the overall value of their position.

To take a simple example, a CFD is as if I said a sort of bet on changes in the price of a standard financial product (which will be your reference or base), this product can be an index, the stock of a company, the price of a barrel of oil or the dollar exchange euro for instance. Virtually any product standard that defines a price change over time and is used extensively in all international markets, often have associated cfd. Moreover you can loop the loop and there are even cfds of other derivatives, such as a futures cfd.

Cfd unlike the other derivatives have a simple rule, “even in the same proportion to the price of the reference product.” So that for example if the shares of Apple are at this particular time of day at 123.48 dollars, the cfd of apple will be in the same moment the same price. So that the plot of a cfd over time also identical to the reference product in question.

So if you end up inventing a silly product that matches the other, why not use the cfd and original product?. Very simple, the lot of advantages over the original produto …

The transaction fees depending on the broker cfds usually NULL, if you read it totally invalid, you buy and sell as many times as you want at the end of the day and no one charges no commission for transactions. Although this is only true for products that are not based on company stock. Ie buy a cfd of IBEX 35 (free), a Dow Jones (free), the price per barrel of oil (free), the evolution of American electric sector (free), the euro / dollar (free) , Telefonica (on commission!). Still cfds commissions are laughing stock, usually 0.08% of the money that move in the operation. (Although some brokers have minimum actions around 8 €).

Cfds operate through rather than using standard products opens the door to normal investor markets are not easily accessible. Since a cfd broker to operate in many international markets: Japan, Australia, USA … and with very different products: Price of gold, silver prices, price mais, Polish Sloty exchange against the dollar. The commission does not depend on the location of the operation. With which even those 8 € by shares are valid in Japan and not have to pay extra fees for using these international markets …

Have a CFD broker allows real-time view of all, I repeat “ALL” financial product in the world with discount and without charge any monthly fee for it. So that instead of paying a connection face to see how it goes in real time NASDAQ, I open my CFD broker and see real time NASDAQ (which ultimately is the same as the cfd because it matches), I Endesa like to see how it goes or Japanese index in real time at 4 am because I can not sleep and I want to play for a while, as the online broker etc.

CFD brokers can operate 24 hours a day, from Monday at 8 am, until Friday at 10 pm. Allowing us to operate in pre-market and post-market (periods of time where there is little movement and to approximate the opening price the next day for example).

The CFD brokers platforms are usually pretty easy to use, very flexible, allowing systems to perform even schedule purchase orders automatically or sale of technical analysis directly on the course in real time. Advanced orders accepted as: “If done” “One cancel the other” or “Guaranteed Stop Loss.” This leads us to nest conditional statements which automatically and without our computer before deciding to take charge at all times if we buy, sell and collect profits or cut losses. Of course there are no fees to cancel orders, change …

A broker cfd only require us to consider a small margin of the entire operation we undertake. So that operations such indices or currencies only have to contribute 1% of the operation, 5% in shares etc. Which allows for incredible leverage, ie with only 1000 euros in theory we could make market transactions worth 100,000 euros.

Today I will introduce a new subject that was not addressed in depth in the blog yet, because we had not given enough basic information exchange, analysis and so as to make it fairly understandable.

The CFDs become part of the so-called “Derivatives”, ie they are products say they invent financial institutions and which refer to other financial product standard, this adds a few new rules and created as if he said a new financial game is completed standardized. Examples of these derivatives are many, like the future of those who have already spoken once, or more complex as the options or warrants (that someday we will discuss). CFDs (Contracts for difference) have some years on the market, although relatively new to countries like Spain (where he now begins to speak of them.) They were invented by which today is one of the greatest “Market Maker” of the world, CMC Markets (UK Broker fully specialized in “currency speculation” and CFDS). Its use is starting to spread like wildfire because of the multitude of benefits it provides and its ease of use compared to other derivatives.

• CFDs allow you to play “short” or “long” is, Long is the usual case of a financial product expected to rise to sell more expensive to buy. SHORT is the opposite: we can start selling 100,000 euros of telephone without having previously purchased even if the course goes under, bought in the fund and the broker we enter the difference. Thus gain much if the market goes up or goes down, you just have to know to be on the side you’re going. Investment operations are instantaneous, if we cfds purchased 100 contracts and see that we are wrong and is going down the course, in seconds we sell 200, so we have closed the operation “LONG” Up and down we opened a (SHORT ) for another 100.
• CFDs have no minimum purchase, we buy as much as 33 cfd only 1 if we want what we want. There is no concept of contracts and in the future.

A CFD (or Contract for Difference) is simply an agreement that exchanges the difference in the value of a financial instrument at the time of opening and closing.

Flexibility and transparency

For example, when operating CFDs on stocks, you trade the market price of the Action, and paid a commission which is calculated as a percentage of the value of the transaction. Our commitment to Spanish and European shares is only 0.1% (see Contract Information).

However, when you open a position does not have to enter the total value of the Shares, but you make a deposit, from 5% in the case of Spanish and European shares. This means that you can trade worth 20 times its initial capital.

When you decide to close the position, is settled the difference between the price at the time of opening and closing. As in the conventional trading Stock Futures, the extent to which you are able to anticipate market trends mark how much you can gain by trading CFDs.

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