Trading CFDs

Archive for the ‘CFD Brokers’ Category

There are a multitude of CFD companies serving the Australian market nowadays, providing varying levels of service at varying prices.

Here is some of the more well-known CFD companies in Australia.

1. IG Markets
2. Macquarie CFDs
3. Man Financial CFDs
4. E-Trade CFDs
5. CityIndex Australia
6. MF Global
7. GFT Global Markets
8. First Prudential
9. Capital CFDs Australia

Since landing on Australian shores in the year 2000, CFD trading and ultimately the quantity of CFD companies have enjoyed exponential expansion.

As such, the marketplace has come to be particularly competitive.

Due to the quantity of CFD companies in Australia, potential traders/investors should spend some time studying to determine which supplier will best meet their needs.

With over 50 CFD brokers to choose from and their numbers growing rapidly the choice can be daunting. But there are a few simple techniques for narrowing down the field.

There are three ways you can trade CFDs:

- Market Maker

- Direct Market Access (DMA)

- Exchange Traded CFDs – Offered by the Australian Stock Exchange (ASX)

Market maker or DMA

Market maker orders are executed directly with the CFD broker and the CFD broker may then buy the underlying instrument as protection for the position. Orders placed with a CFD broker using Direct Market Access (DMA) are placed directly into the underlying market by the CFD broker and when the order trades in the market your CFD order is executed. Exchange Traded CFDs are offered by the Australian Stock Exchange (ASX) and are traded more like stocks with orders placed into a central auction facility run by the ASX CFDs.

First Decide What You Wish to Trade

The easiest way to choose between these three execution models is to determine what you are likely to trade. To trade overseas shares, indices or currencies, you will have to choose a market maker model or a very limited selection is available through the ASX CFDs. Direct Market Access (DMA) is not offered for these instruments. If you choose to trade local shares only, then you can choose any of the different execution models.

Guaranteed Stops or Not

The choice now comes down to whether you wish to use guaranteed stops and once again pushes towards the choice of a market maker platform, although a few CFD brokers do offer guaranteed stops and the DMA execution model. On the other side of the coin, if participating in the opening and closing auctions is important to you or your trading strategy, then you will be choosing the DMA model or exchange traded CFDs. If it is important for you to see the orders you place appear and execute in the underlying market, then again your choice will be to use a DMA provider or trade exchange traded CFDs.

Trading Platforms Rule

Most people will however make their selection based on the trading platform that they prefer to use. All CFD Providers provide some form of trading platform to execute your trades. There are a wide variety of platforms, functions and features available. Most trading platforms include some form of charting as well as news items and different styles of orders for execution.

Choosing the Best CFD broker for you will depend on finding a broker that provides the services that you require for your trading. It will depend on the instruments you want to trade, the size of your trading account, the frequency of your trading and the trading platform you want to use.

Deciding which CFD broker is best, comes down to asking the best possible questions to determine your CFD trading needs. Today we are going to look at the most appropriate questions to ensure your CFD broker is right for you.

Asking the right questions comes down to making sure you are clear on your objectives when it comes to trading CFDs. To help determine your objectives here are a list of questions you may want to consider before choosing the best CFD broker.

What products/instruments are you looking to trade?

Deciding on which financial instruments you are looking to trade is vital before jumping on board with a CFD broker. Most traders starting out with Contracts for Difference begin by trading their local stock market. As a result pretty much any CFD broker will do in this instance. If however you wish to trade a range of international markets, foreign exchange, indices and sectors then your choice of CFD brokers will narrow. As a general rule the only CFD broker that allows you to trade multiple exchanges around the world are market-makers.

Direct Market Access or Market Maker?

Choosing between direct market access and a market-maker does not have to be difficult. If you wish to trade the local exchange with the highest degree of transparency, never get re-quotes, participate in opening and closing options and see your orders in the market depth, then the Direct Market Access (DMA) model is right for you.

If your priority is to access all the world’s markets through the one account including foreign exchange, indices, sectors and commodities and transparency in market depth is not your highest priority and you trade small parcel sizes then a market-maker might be the best option for you.

Do you get access to support?

When starting on any new venture getting the right support is absolutely critical. When it comes to trading Contracts for Difference, customer support from a technical point of view as well as dealing support is absolutely vital. Always ensure your CFD broker has 24 hour support and a good supply of free online training tutorials for you to gain confidence in the system.

Is the Trading Platform easy-to-use?

Modern technology plays a vital part in the online financial world and it is now common practice for a CFD broker to offer a live demo account. Ideally you want to take advantage of this free demo account to ensure you are comfortable and confident in placing trades online. Whilst you are trialling their demo it’s a good idea to make a few customer support enquiries to see how the support operates.

By asking these four simple questions you will ensure you find the best CFD broker to your trading needs.

CFDs allow people with small quantities to get much more safely started within the market by increasing their diversification.

By using CFDs, we only need to put up a fraction of our capital to obtain the same exposure on the stock than if we had bought shares through our share broker.

This capability to diversify is the overriding reason for using CFDs. We believe, in general terms (and up to a limit), the more trades you’ve exposure to, the much better that you’ll do in the long run. This really is simple because getting your money spread across as many stocks as possible (within reason) will improve your diversification within the market, and as a result decrease your risk.

With CFDs, $100 successfully has $2,000 investing power within the market. Many investors only have $2,000 to invest in the first place. You can’t get a lot diversification with $2,000 – the risks to this little amount of capital are therefore massive. Not to mention the percent that commissions and fees will consume up on this kind of a little quantity.

With CFDs, however, our little $2000 gets as a lot as $40,000 investing power in the market.

This indicates you can invest in as many as 20 trade suggestions (in theory) in CFDs. If done properly, it’s actually less risky to purchase CFDs – simply because we are able to get much better diversification.

Now, absolutely nothing in life is free of charge. To those out there that were not aware of this – we sincerely apologise for spoiling the dream.

For this fantastic diversification your CFD supplier will charge a number of fees. Some of these costs are the same as you’d spend if you had been investing in shares, but some are a wee bit different.

The costs which are generally associated with CFDs are:

Trade Commissions – generally charged as a flat rate as much as a particular trade size, and then a percentage of the trade size following that.

There are a number of CFD companies out there – you can Google them. We use IG Markets, and the costs below are based on IG. As far as we can tell they possess the lowest commissions and financing costs (explained beneath)

Minimum commission: $1 (on-line trades), $10 (phone)

Otherwise: 0.1% of total value of trade.

Example one:

We place down $100, and get exposure to $2,000 worth of stock.

Commission – $10.

Example two:

We place down $1,000 and get exposure to $20,000 worth of stock.

Commission – $20 (0.1% x $20,000)

Funding – for that benefit of only placing up a fraction of the trading capital, our CFD supplier will charge us a financing charge if we purchase, and pay us an interest rate if we are short.

Let us explain.

We place up 5% of the transaction. Our CFD provider effectively loans us the other 95% so we can have the advantage of complete ownership of the shares.

They will charge an interest rate over the loan quantity. This rate is 2.0% pa above the cash rate. The quantity is calculated every day.

So, if we put $100, and get exposure to $2,000 worth of stock, our CFD provider will charge us 7.5% x $2,000 / 365 per day. This is 41 cents per day. If you had been to hold the position for three months, financing this position would cost $37.

This is the cost of diversification.

You have to choose if 41 cents each day, every $2,000 position, is greater than the danger of only being able to keep one share in your portfolio with your $2,000.

Let’s say together with your $2,000, you enter ten trades. You are able to reap the advantages of getting 10 stocks in your portfolio for $4.10 a day.

Now, there’s an important point here that we need to bring to our your attention. Those thinking that 7.5% pa calculated daily is a big consideration, must also consider what your money ought to be making by permitting it to sit in your money management accounts – rather than in the accounts from the individual you would have otherwise bought the shares off if you had gone via Komsec.

Let’s think about it.

Buy XYZ shares with Komsec – send them a cheque for $2,000. The zero balance of one’s money management account is now earning 5.5% pa, that is, certainly, nothing.

Purchase XYZ CFDs and only use $100. The balance of your money management accounts is now $1,900 making 5.5% pa.

When you take a look at it, while you are paying 7.5% pa on $2,000 for that CFD placement, you’re nevertheless making 5.5% on the $1,900 extra you would have in your money management accounts – money you wouldn’t have experienced if you traded with Komsec.

So the cost of financing, in practice, can be far less than 7.5% pa.

We think diversification is vitally important to each and every trader. The danger of holding shares in only one company is substantial. In any case, every investor will need to assess the worth of diversification for themselves and whether CFDs are an appropriate trading tool for them.