Simplicity of CFDs

Posted By Robert On Friday, April 24th, 2015 With 0 Comments

CFDs have so many benefits over other derivative products, namely their simplicity to trade.

Firstly majority of CFD products do not expire like warrants, options and futures although CFD products that are designed to specifically mirror these can have expiry dates. This enables traders to leave positions open as long as they see suitable without being forced to close a good/bad trade due to time constraints.

There are no ‘Greeks’ to factor in. The ‘Greeks’ are the dimensions of risk involved in taking a position in an option and or other derivatives products. They explain the relationship of the option to its underlying asset. As an example Delta is the measure price sensitivity. It represents the rate of change between the options price and the underlying assets price. So if an option had a Delta value of 0.8. This would mean for every $1 the underlying assets value would increase the options value would only increase by 80c. In the case of CFDs, in particular DMA CFDs, they have a perfect correlation with the underlying assets and hence they are much easier to understand and trade. If a CFD trader held 1 BHP CFD and the underlying stock Also in Australia other derivatives markets like options and warrants a relatively illiquid in comparison to CFDs.

For the majority of Equity traders CFDs can be explained as share trading on leverage. For simplicity sake you are trading the same underlying asset with less capital required rather than having to trade something completely different in a market you are unfamiliar with.

Most providers will also enable you to open an account overnight which is fantastic. Equity accounts are notorious for taking quite some time to open up and get trading.

Lower Transaction Costs

CFD commission and financing rates are far less than any other comparable products. Considering the exposure gained CFD are much cheaper and less complicated than options or warrants. Share trading is also known to be notoriously more expensive.

Share trading firstly incurs GST unlike CFDs so there is an automatic 10% saving for CFD trading. Providers for both CFDs and Shares will usually charge a minimum commission along with a base commission rate and the trader will pay the greater of the two. Now share trading minimum ticket fees are anything from $15 up to in excess of $50. My CFD provider minimum ticket is only $10 for a standard account but some will charge up to $25. For those who are much larger traders where the commission rate will be applicable most providers will offer a rate of 0.1% of the full notional value and the more expensive will be up around the 0.25%.  Generally speaking share trading is a bit more expensive and then you have to add GST.

In my case I do more than $1m in turnover a month and my provider allows me to trade with 0.09% and a $9 minimum. The clip below will show you the true savings when trading CFDs instead of shares.

For serious higher volume CFD traders some providers will offer rates as low as 0.06% without minimum charges.

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