It’s not hard to find blogs and forums where people talk about the benefits of CFDs over shares but have you questioned whether the people actually writing these comparisons are traders who have experience in both financial instruments or are they just paid authors out to promote CFDs. In this quick review we will touch on the differences between both CFDs and shares and highlight the unique aspects of each product that has allowed traders and investors to harness the power of their investment portfolio from the comfort of their own lounge room.
CFDs and shares are very different not only in the way they work but also in how they are traded. One of the fundamental differences is the fact that CFDs are an over the counter or OTC product meaning your transactions are not conducted on an exchange but rather with the CFD provider that you are dealing with. Shares on the other hand are traded on an exchange meaning that you are buying and selling off other people in the market with your stock broker simply acting as a conduit providing you with a gateway to the market.
So now that you know one of the most important fundamental differences between CFDs and shares let’s get into some of the key mechanical differences in detail.
Settlement One of the most apparent differences between both products is the way in which they are settled. When you buy shares on the stock exchange you don’t have to pay for the share for three days, conversely when you sell shares you do not receive any money for three days. The transaction day plus 3 days or T+3 is the settlement period set by the clearing house not the broker. Of course when trading CFDs there is no clearing house involved as the transaction is OTC this means the your CFD provider essentially sets the rules, as CFD providers typically do not want to wear the risk of having the settlement of a transaction fail they will ask for the money upfront, this concept of same day settlement is known as T+1. It’s worth noting that some online share brokers also apply T+1 settlement to minimise the risk of settlement failure.
There really is no real advantage of T+1 or T+3 settlement as ultimately the net effect is the same, however most active traders prefer same day settlement for the simple reason that it makes their cash flow easier to manage.
Leverage Unquestionably the most important and apparent difference between CFDs and Shares is the concept of leverage. By the very nature of the instrument CFDs are leveraged meaning that for a relatively small outlay you can obtain a relatively large exposure to a share. Typically the margin rate on most CFDs is around 10% this means that with a margin of $1,000 you could potentially gain $10,000 exposure to the price movement of a share. If you were to buy $10,000 worth of shares you would have to outlay the full amount, rather than the $1,000 required to open your CFD position, providing a more efficient use of capital and return on your initial investment.
It is important to be aware that although leverage can work in your favour, it can also work against you, this means that your profits and your losses are amplified however you can also potentially loose more than your account balance. With share trading on the other hand you cannot lose more than the amount paid, however you profit potential is also reduced.
Short Selling Equally CFDs and shares can be short sold although the process is often easier with CFDs for the simple reason that short sell transactions can be done online rather than over the telephone. The main reason why short selling shares directly is not a simple process is due to short sale reporting requirements which must be disclosed via tagging short trades executed on the exchange. Although CFD providers also have short sale disclosure requirements to meet they are not required to tag short trades for the simple reason that they often pre borrowed stock to cover any short sales, essentially this means that they have covered their clients short positions before the client even places the trade.
Costs of Trading A common myth in the market is that CFDs are cheaper to trade than shares, however this is not always the case. Financing plays an important part in CFD trading however most traders often forget about this. Without conducting any mathematical calculations as a rule of thumb an AUD $100,000 position will cost you around $25 per night in financing, on this basis if you hold a position open for at least 5 days this is the equivalent on paying $125 in brokerage or 12.5 basis points. Of course if you don’t have the capital it may be worth paying this however if the margin of the CFD is high you should think twice as CFD financing is not calculated on the borrowed amount but rather on the full notional value of the position as such it may be more economical to pay for your position outright and pay a higher upfront brokerage cost.
CFDs can of course be a cost efficient trading tool but this is only when positions are held open for a relatively short period of time however, share positions on the other hand can be held open for as long as you like with only the initial transaction cost payable, this is an important difference to keep in mind.
Despite having to pay financing costs one of the benefits of CFDs is that you are not required to pay any GST on your commission, although a relatively small amount it is worth considering the impact of GST on your trading costs if you are an active trader.
Unrealised Profits As CFDs are marked to market on a daily basis your profits or losses are also debited or credited from your account daily this is very different to trading shares where profits or losses are only realised at the time of sale. In this regard one of the benefits of CFDs is that you can utilise your unrealised profits without having to close your positions, naturally there is also a downside to this in that your losses are realised on a daily basis meaning that unlike share trading the free equity in your account may decline without you closing positions.
Only five differences have been touched upon in this article, in later articles we will cover some additional differences between shares and CFDs. In the meantime if you would like to find out more interesting information about share and CFD trading you can download our free CFD guide.
Australia has the highest per capita share ownership in the world so it’s not surprising that there are so many online traders. The recent explosion of the speculative resource sector has turned everyday people into professional investors, simply through trading shares online. Recently we have seen some phenomenal price moves never before seen in the micro cap resource sector of which many online CFD and share traders have taken advantage of.
Of course before you can get started online trading you must have the right tools for the job. Most online traders can get by with a one PC and monitor and an ADSL internet connection however the more serious online traders tend to use two monitors and have two internet connections to ensure that if one connection goes down they can still trade. Of Course having the right hardware does not mean much if you don’t have a broker account and a trading plan.
Most people new to online trading will choose a broker that they can do both the share and cfd trading thorough, there are relatively few of these so make sure that you do your homework and choose the one that can offer you a platform that suits your trading strategy.
Online trading is a lifestyle change and choosing a strategy that suits is important, generally there are three types of strategies short, medium and long term which each requiring a very different level of attention. Of course there is no point quitting you day job to start online trading CFDs and shares if it results in more work not less. Most people give online trading a go for a few months, starting with a relatively small capital outlay before they commit to trading full time.
To learn more about CFD trading you can download and read this free CFD Guide.
CFD trading is a relatively new concept to most traders and investors in Australia, which is understandable given the mechanics of CFDs are different to traditional share trading. Having an advisor or trading mentor who is able to explain the concept of CFDs and assist you to identify trading opportunities is often a relatively safe way for new CFD traders to gain exposure to financial markets.
There are many stockbrokers and financial advisors in Australia who are able to help traders and investors looking to enter the stock market, however very few have an in-depth experience and understanding of CFDs and how they can be used not only as a hedging tool over a share portfolio but also as a great way to gain exposure to global stocks, commodities, indices and forex pairs.
Some CFD providers are able to provide you with basic CFD trading advice and education however many of them will not provide you with CFD trading recommendations. There are however some CFD providers who are able to provide you with advice and trading recommendations, it is these providers that often also specialise in other aspects of money management including financial planning, corporate advisory and funds management. Dealing with a CFD provider that does not solely specialise in CFD trading is often a good idea for novice traders looking for some assistance in managing their trading portfolio and understanding the risks and benefits CFDs.
Dealing with CFD providers who offer an extensive range of products and services aside from solely offering an online trading platform has a number of advantages in that often you will be assigned a personal account manager with whom you can liaise on a daily basis and ask questions. If you require additional services such as being contacted in the event of a trading idea you can also elect this, however you may be charged a higher commission rate when using this service. Often added benefits such as being able to participate in highly sought after placements and IPO’s will also be provided.
In many cases getting CFD trading advice from your stock broker or CFD provider will cost more than trading for yourself online, however the added commission charges are relatively insignificant when you consider the benefits and are far cheaper than the looses that many novice traders incur when placing trades without a well thought out trading plan or strategy.
Before trading CFDs either online yourself or with a CFD provider who is able to provide you with CFD trading advice it is essential that you understand not only the benefits of CFD trading but also the risks. Often newbie CFD traders fail to understand that although the leverage associated with CFD trading can result in gains it can also result in large losses, this is why having an understanding of risk management is important.
To learn more about CFD trading it is advisable that you read this free CFD Guide.
WebIRESS is one of the most commonly used CFD and Share trading platforms in Australia, being adopted by some of the country's largest online brokers and leading CFD providers. In recent times webIRESS has undergone a makeover, with the latest version webIRESS Plus recently being launched.
WebIRESS Plus offers day traders and scalpers a number of significant advantages over it's predecessor, with the most noticeable being the speed of order execution, additional advanced order types and visual improvements. The significant improvements of webIRESS Plus make it the ideal CFD trading platform for day traders and scalpers looking to take advantage of rapid CFD price movements in the opening and closing phases of the market and during market volatility.
WebIRESS Plus is fast becoming the most popular CFD trading platform in the market due to the significant edge traders are able to gain as a result of the platforms dramatic speed improvement. In addition to the speed improvements in webIRESS Plus, there are now also a number of new order varieties including if-done orders, meaning CFD traders now have more control over their trades with the ability to set and forget orders.
Despite the significant advantages webIRESS Plus offers day traders and scalpers it is important to note that the speed advantages of webIRESS Plus are dependent on the internet connection being used. As an active trader it is always advisable to ensure that you have the fastest and most reliable internet connection possible, this may mean having an ADSL2 or cable broadband connection. Most active traders will always have two internet connections to ensure redundancy should one connection fail.
Active day traders often use the webIRESS Plus platform alongside an advanced charting package or market scanning tool. One of the more common and readily available charting packages is MetaStock another lesser known package is Spark. Spark is popular with more active day traders who monitor many CFDs at the same time and require detailed real-time information relating to price and volume changes which when combined with chart formations allow them to identify trading opportunities such as price and volume breakouts.
Of course a great trading platform, charting package and internet connection alone will not make anyone a successful trader. These are simply tools that will give you the edge over other traders in the market. The most important components of trading are information flow and discipline which when combined with a proper trading plan and tools will help you on your way to becoming a successful trader.
Currently webIRESS Plus is only available from IC Markets. You can download a webIRESS demo to see whether the platform suits your needs.
The webIRESS trading platform is one of the most common online share and CFD trading platforms in Australia. WebIRESS is used by most of the major online brokers including, Comsec, Etrade, and Bell Direct, however like all on-line trading platforms some traders might experience technical hiccups when first logging in. Some of the more common technical issues that you might encounter along with simple solutions are outlined below.
By far the most common technical issue encountered by new webIRESS users is what is known as the “ticking clock error” this is simply and endlessly ticking clock that appears in your browser along with the words “installing software please wait”, however, unfortunately for most the wait is endless. The “ticking clock error” is a common problem with a simple solution, this error occurs because Sun Java 1.4 or better has not been installed. The problem can often be resolved through a quick Java update, or new installation from the Sun Java website. In certain circumstances a recent version of Java may already be installed yet this error still occurs, often this is due to a popup blocker or antivirus software preventing your computer from accessing “webdf.iress.com.au“ and Port 6080 or 80, this can be corrected by allowing your firewall or antivirus program to access “*.iress.com.au” and port 6080 or 80. As a precautionary measure you should always clear your browsers cookies and temporary internet files before making any changes to ensure that your old settings are deleted.
Most webIRESS problems are related to Java or the security settings on your computer, however on occasions problems may arise as a result of your internet connection or LAN firewall settings. Testing connectivity to the webIRESS server is easy and should be done if you are unable to resolve you connection problems through the installation of Java or firewall and antivirus permission changes. A simple telnet connectivity test can be run by following the instructions below:
1. Go to “Start” > Run or open a DOS command window.
2. In the Run dialog box or at the DOS prompt, type: telnet web.iress.com.au 6080
3. Press Enter.
A Telnet window opens with the message “Connecting to web.iress.com.au…”
If the connection is successful, the Telnet message will disappear leaving a flashing block or cursor in the top left corner of the Telnet window.
If a connection cannot be established you should contact your ISP or network administrator as it is likely that ports 6080 or 80 are being blocked by your firewall.
These are some of the most common webIRESS problems, if after attempting the above solutions you are still unable to resolve your webIRESS connection problem you should contact your broker who will be able to conduct more advanced webIRESS troubleshooting.
You can download a free webIRESS Plus demo to see whether the new webIRESS Plus platform solves many of the technical issues that you may have experienced using webIRESS.
CFD trading can be lucrative for those traders with a proper trading and risk management strategy in place however like any new venture learning the ropes can be difficult. CFD trading requires skill and knowledge of financial markets in addition to a proper trading plan. The unfortunate fact is that many novice CFD traders fail, failure is often caused by a lack of discipline and knowledge of financial markets.
Good CFD education can fast track the learning process that any new CFD trader should undergo prior to starting out. Free CFD seminars are always a good starting point as most CFD seminars cover the basics of CFD trading which can help novice traders understand the essentials, paving the way for the development of a trading plan to suit their lifestyle and risk profile.
Of course most free CFD seminars will only cover the basic elements of CFD trading. It is always recommended to enrol in a paid education course designed especially for CFD traders if more advanced knowledge is required. There are many paid CFD trading courses available which can help prospective CFD traders build a good understanding of the product itself, formulate a trading plan and learn proper risk management strategies.
The CFD trading courses available are all very different some are more advanced than others this is why it is important to choose a course that covers the key elements of CFD trading. Below are four essential elements that a good CFD trading course should cover:
1. How CFDs can be used within you overall wealth management strategy.
2. Risk management and how to incorporate it into a trading plan.
3. How to develop a trading plan to suit your lifestyle.
4. How to properly develop a money management plan.
Of course these elements are very broad and should only be used as a guide when choosing a suitable CFD trading course.
Attending CFD seminars and paid educational courses will help you with the theoretical component of your trading education however theory is only of value when it is applied in practice. The providers of some paid CFD educational courses will also offer you mentoring and coaching services, this is an essential competent in the educational process as more often than not the biggest and most expensive mistakes will be made in your first month of trading. Having a trading coach when you first start out will help you gain confidence before going out on your own.
After the first few trades you will begin to realise the power of CFDs and how can use them in your trading strategy, of course trading CFDs also comes with risks which if not managed correctly though a disciplined risk management plan can result in losses, this is why good CFD education is essential.
To learn more about CFD trading you can download our free CFD Guide.
Incorporating a proper risk management plan into you CFD trading strategy is the single most important aspect of CFD trading. Risk management involves determining the amount of money that you wish to allocate to each trade to ensure that you are able to continue trading should you sustain a loss on the position.
Trading CFDs without a proper risk management strategy can expose you to unnecessary risk. For example, if you allocate a large portion of your trading capital to a trade without a proper risk management strategy, you put all of your trading capital at risk meaning that if you sustain a loss you will no longer be in a position to trade. Losing your entire capital base can force you out of the market and you will not even have the opportunity to recoup your losses.
The most common form of risk management is position sizing this is also known as the fixed dollar trade size model. In this example an equal amount of capital is used for each trade.
For example, if you have $100,000 to invest, you need to figure out how much to put into the trade. To figure this out you would simply divide $100,000 by the price of the CFD. If the last traded price of the CFD was $8.50 you would divide this by $100,000 to determine the amount of CFDs you can buy, in this case the number would be 11,764.
In order to determine the amount of risk involved in the trade you will have to work out how much you can afford to lose if the CFD moves against you and set your stop loss at this point. This is also known as the stop loss distance, which is the distance between the entry and stop loss price.
For example, if your stop loss is $8.00 and entry price was $8.50, this means that your stop loss distance would be $0.50. If you have 10,000 CFDs your risk would be 10,000 multiplied by $0.50 or $5,000. In this case your risk would be $5000, which equates to the amount that you could lose should the trade move against you and you get stopped out.
It is also important to factor in the cost of commission and any financing charges that you may have been incurred from holding the position overnight.
In the fixed dollar trade size model the number of CFDs that that you buy and sell each time will not always be the same, this is because the stop loss size will vary depending on the risk appetite that you have on the trade.
Another form of risk management is compounding, this means that as your account balance increases, you are able to open larger positions.
For example, if you have a starting balance of $100,000 and you have determined that you can afford to have 10 trades open at any given time. As your account balance grows, you will be able to take on larger trades. This strategy can be used up to a point when your drawdown gets too big for your liking and risk appetite.
It is also important to note that if you are trading a CFD that has liquidity issues, you may get to a point where your trade sizes are too large.
To understand more about CFD trading and how you can manage your risk you can download our free CFD Guide.
There are many good CFD brokers in Australia, their active marketing and promotions make it difficult to chose, some have advantages over the others but more often than not it is their fancy marketing makes you confident in your choice of provider.
When you sweep away all of the fog and evaluate each of the best CFD brokers on a few key metrics you will soon discover which provider genuinely suits your trading needs.
There are as few key metrics that you should judge your CFD broker on, these are:
• DMA or Market Made
• Web based or Downloadable trading platform
• Product Range
DMA or Market Made
It is important to ensure that you understand the differences between DMA and Market Made CFDs and the pro’s and con’s of each. DMA CFDs offer a few advantages in that they allow you to trade the opening and close phase of the market in addition to allowing you to participate in the market depth. DMA CFD are popular with scalpers and day traders but are not so popular with traders needing exposure to indices or currencies and wanting to place guaranteed stop loss orders, this is where Market Made CFDs have significant advantages over their DMA cousins.
Web Based or Downloadable trading platform
It can be quite confusing when choosing a CFD brokers platform as each platform has benefits and drawbacks. It is important to consider where you will be trading from as this will decide whether you use a web based or downloadable platform. If you intend to trade from work it would be better to choose a web based trading platform for the simple reason that web based platforms do not require a download, this means that they cannot be blocked by the firewall in an office, however, web based platforms come with some downside also in that they tend to lack much of the advanced charting functionality of downloadable platforms. Downloadable platforms a more suitable for home use as they offer significantly more advanced charts and order types in addition to added features such as back testing and customisable multi screen layouts. Professional day-traders and scalpers often prefer using downloadable platforms whereas casual traders tend to choose web based platforms.
It is important that when choosing the best CFD broker for your needs you should assess the products that they offer to ensure that can provide a range of CFDs that suit your trading plan. Some CFD brokers only offer CFDs on Australian Shares however others offer CFDs over stocks, indices and forex. If your trading plan covers all of these products you should be sure to choose a provider that does not restrict you to Australian share CFDs only.
Of course when choosing the best CFD broker for your trading needs you will need to asses all of the metrics above and make your determination based on your trading strategy. It is also advisable to download a few demo trading platforms available in the market, this will help you better understand whether the platform is suitable for your needs and trading style.
To understand CFDs in more detail and to learn how to develop a trading plan you can download our free CFD Guide.
There is a common misconception in the CFD industry that commission rates on DMA CFDs are higher than on their Market Made cousins, in this article we will dispel this myth and help you understand the differences between Direct Market Access (DMA) and Market Made CFDs and why this is a common misconception amongst traders and investors.
If you are a CFD trader you will probably already know that there are two types of CFDs, DMA and Market Made, the primary difference being that when trading with a DMA CFD provider your orders flow directly into the underlying market whereas with the Market Made variety your orders are accepted at the discretion of the CFD provider and may not always flow onto the market. Most Market Makers essentially run a book aggregating all of their client’s positions and hedging any resultant outstanding amounts.
The common misconception of pricing has come about due to the fact that DMA CFD providers incurring a cost to hedge their trades. Many people believe that because of this additional hedging cost DMA CFDs are more expensive to trade, however this is not the case. With the advent of electronic order routing DMA execution costs have decreased significantly. DMA cost reductions have been primarily due to brokers competing for market share and the rebates provided by the exchanges for high turnover market participants. With DMA Costs down to 1bps or less it is not surprising that many CFD market makers are now also offering DMA CFDs and hedging risk on their market made book more frequently.
The ultimate beneficiaries of lower hedging costs are the end clients of the CFD provider. As hedging cost decrease your DMA CFD provider is able to pass on these cost reductions to their clients, meaning that today retail traders are able to day trade and scalp DMA CFDs relatively cheaply.
With no real difference in commission between trading DMA CFDs or trading CFDs with a Market Marker it is not surprising that DMA CFDs are gaining in popularity amongst retail traders and professional investors alike. Some DMA CFD providers are even offering commission rates that are lower than those offered by their market made cousins, pioneering a path for the new wave of CFD trader.
Of course you should always bear in mind that there are advantages and disadvantages of both CFD varieties, it is important determine which variety is more appropriate and suitable for your style of trading.
You can find out more about trading DMA CFDs in our free CFD Guide.
In the early days investors wanting to borrow money to invest had few choices, either borrow money from the bank to buy shares or call your stockbroker and apply for a margin loan.
In 2003 traders and investors in Australia were given another choice, CFDs. Since their introduction the industry has changed, CFDs being a simple form of margin lending have become the fastest growing derivative product in the country, outstripping the grow seen in the warrants market during the mid 1990’s.
No longer does a retail investor need to apply for a bank loan or deal with expensive full service brokers. CFDs have revolutionized the financial services industry, retail investors can now open a CFD account online in minutes and be up and trading before the end of the day, executing all of their orders in real-time online.
Unlike margin lending CFDs are typically traded over the internet with the trader’s portfolio being marked to market throughout the trading day, this is substantially different to the end of day portfolio revaluations used by margin lenders. Real-time portfolio margining means that traders can properly manage risk during the trading day rather than having to wait for statements to be generated at the end of the day.
Like shares bought using a margin loan CFDs offer the holder the ability to receive a dividend, however in most cases franking credits are not passed on the holder of a CFD unlike that that of a margin loan. The reason franking credits are not passed when holding a CFD is because the owner of a CFD holds an over-the-counter derivative contract and not the physical share. Not owning the physical share when holding a CFD position also means that the owner of a CFD is not entitled to voting rights in the listed company over which the CFD is based. Many CFD traders only hold their positions for a short period of time and are not interested in voting or franking credits but instead are interested in making a profit from the short term price changes of the share over which the CFD is based.
One of the most significant advantages of CFDs is that traders are able to sell them just as easily as they can buy them, what this means is that going long is just as easy as going short, allowing traders to profit in falling markets. With traditional margin lending short selling is difficult and near impossible.
CFDs are relatively cheap when compared to margin lending, typical brokers offering margin lending will charge 0.50% whereas a typical CFD provider will charge around 0.10%. One thing to be wary of is the interest rates charged by margin lenders and CFD providers. It is important to note that margin lenders will charge interest on the amount borrowed whereas CFD providers will charge interest on the full notional value of the open position, however CFD financing rates tend to be lower. Financing rates are an important cost to consider when comparing both products but this is less important for CFD traders that only hold their positions for a short period of time.
Typically CFDs offer traders more leverage than conventional margin loans allowing traders to obtain a better return on their investment. You should also be aware that an increase in leverage can also result in an increase in risk, this is common with all leveraged products. The leverage offered by CFD providers can be as much as 100 times (1% margin) whereas margin lenders will generally only offer around 10 times leverage (10% margin) or less. Leverage will vary between each CFD provider and margin lender and is often determined on a stock by stock basis considering the market capitalisation of the stock and liquidity.
As CFDs are an over-the-counter derivative product it is important to note that you do not own the underlying share or instrument over which the CFD is based, this also means that you cannot transfer your position to another CFD provider or stock broker you can only deal with the CFD provider that you opened up the position with. When you buy shares on a margin loan the shares are held in your name this means that you are able to move them freely from one stock broker to another.
CFDs suit short to medium term active traders looking to take advantage of market movements in both directions, however, margin lending is better suited to people who are looking for long-term investment opportunities and to take advantage of the tax benefits franking credits provide, in addition to voting rights. It is important to remember that both products are leveraged, as such should ensure that you adopt a proper money management plan and not utilise the leveraged offered to its full capacity.
To discover more about CFD trading and using CFDs in your trading plan you can download our free CFD Guide.