Ok, so we want to tackle CFD's....
...or at least look more deeply into them yeah!
Once again, as always i am going to remind you that i am just like you, trying to learn more all the time, and therefore dont assume that i know everything.
Contracts for Differences (CFD) may sound like a complicated term, but by now you must have learned that most things in this world sound worse than they are. Basically you are taking a contract out with the broker/market maker for the difference between the price you bought the contract and the price you then sell it.
Now that wasnt too bad was it.
Obviously there are other elements, but thats the basic "gist" of the whole thing.
When you buy a CFD, you do not own the physical stock/share, just the rights to sell the contract at a later date. This means that instead of having to spend
loads of money to get any real opportunity of making good gains by the "normal" process of buying and selling stocks, you can risk a more reasonable amount by simply buying the contract, and then selling it at a higher price,
and then pocketing the difference.
The real advantage to this is that you get to use somebody elses money as margins of only 10% generally are needed!!
Let me give an example...
Buying
BT Group (Long Position)
Opening
the position
BT Group shares are trading at 205 to 205.5 in the stockmarket and you
decide that they are looking cheap. You buy 5,000 shares as a CFD at the
offer price of 205.5p. The commission on the transaction is 0.5% plus
a £15 contract charge thus totalling £66.37, but you pay
no stamp duty thus saving £51.38. While your position remains open,
your account is debited to reflect interest adjustments and credited
to reflect any dividend payments.
Interest
Adjustments
Interest is calculated daily by applying the appropriate interest rate
(2.5% + LIBOR) to the daily closing value of your position. In this example
the applicable interest rate may be 6.5% and the closing value of your
position £10,500 (5,000 shares x closing price of 210p). Thus, the
interest for this position on this particular day is £1.87 (i.e.
£10,500 x 6.5%/365) Each days interest calculation will be different
and will be posted to your account on a weekly basis.
Closing
the position
The share price of BT Group has risen to 225 to 226p and you decide to
take your profit. You sell 5,000 shares at the bid price of 225p. The
commission on the transaction is 0.5% plus the £15 contract charge
thus totalling £71.25.
Your profit on the
trade is calculated as follows:
Closing
Level: 225p
Opening
Level: 205.5p
Difference: 19.5p
Profit on trade:
19.5p x 5,000 = £975
Calculating
the overall result
To calculate the net profit on the transactions you also have to take
into account commission, interest adjustments and dividend payments. In
this example you may have held the position for 18 days, at a total interest
cost of say £36.32 and no dividend payments were made during this
time. Your total profit is thus:
Profit
on trade: £975
Commission: (£137.62)
Interest
Adjustment: (£36.32)
Dividend: £0
Overall Profit:
£801.06
So.... did you understand all that?
I know that there will be other questions you want answers for, i.e commisions, interest rates etc etc, but one step at a time yeah...!
For an in depth read on the finer details then go here.
Its a lot to take in, but well worth the read
as this could be one of the best way to get real gains.
But, it has to be pointed out, that the contract HAS to the sold at some point. If the market has gone against you, then you still have to sell and settle the difference, or every day that you keep it going (in the hope of a rally in your direction) you have to pay the interest.
Charting Technical
