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CONTRACT FOR DIFFERENCES (CFDs)
Contracts for difference (CFDs) are one of the world's
fastest-growingtrading instruments. A CFD - which stands for
"contract for difference" - isan agreement to exchange the
difference in value of a particular share orindex between the time
at which a contract is opened and the time at which itis closed
Contracts for differences (sometimes referred as swaps or waves)
allowinvestors to take long or short positions, and unlike futures
contracts have nofixed expiry date or contract size. CFDs mirror
the movement and pricing of
the underlying share. A CFD allows a trader to gain access to
the movementin the share price by putting down a small amount of
cash known as amargin
While the contract remains open, your account with the provider
will bedebited or credited to reflect interest and dividend
adjustments. You canchoose to "long" or "short" a position - if you
are long, you receivedividends and pay interest, if you are short
you do the reverse. Commission
is paid on either side of the contract and you can close a
contract at any time.In practice there is no minimum contract value
though, normally, thesmallest contract value will be 10,000.
http://www.asx.com.au/products/cfds/market_update/20090911.htm
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CFD Trading Example
To place a long trade you need to place an order to buy the CFD.
Eachbroker will use a slightly different method to place orders but
if you havebought a share before, it will be very easy to adapt to
buying CFDs. To tradeshort, you need to place an order to sell the
CFD. The mechanics of placingthe order will depend on the CFD
provider that you are using.
Opening the positionSay WXY Ltd is quoted in the market at
$3.71/3.72. You think the price isdue to rise, and decide to buy
10,000 shares as a CFD at $3.72, the offer
price. Your initial outlay (supposing WXY Ltd is an S&P/ASX
20 stock) isjust 10% x 10,000 shares x $3.72 = $3,720. The same
outlay with a regularstockbroker would only give you exposure to
the performance of 1000
shares. The usual commission rate on this transaction is just
0.1% or $37(10,000 shares x $3.72 x 0.1%).
Closing the positionA month later WXY Ltd has climbed to
$4.06/4.07 in the market & youdecide to take your profit. You
sell 10,000 shares at $4.06, the bid price. Thecommission payable
is $41 (10,000 shares x $4.06 x 0.1%). Your gross
profit on the trade is calculated as follows:
Closing level $4.06
Opening level $3.72
Difference 0.34
Gross profit on trade $0.34 x 10,000 shares = $3,400
Note: To determine the overall profit on the transaction you
would also haveto take into account the commission you have paid
& interest and dividend
adjustments.
