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CFD reality

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Frequent Contributor
In february this year i bought some CFDs of Newgold and Billiton, GLD/BIL. By some mistake i got the ordinary shares of BIL instead of BILcfd. After 8 months I sold both last week. Both increased by about 11 pc. with profit of about 2500.- from each post. However, after interest and charges I only got 1350.- from GLD but 2150.- from Billiton. Sometime a mistakes are good for you!
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14 REPLIES 14
Not applicable
And there you have the CFD rub! They are an expensive forms of debt, because your interest portion is not calculated on your principle amount, but the current exposure - a very sneaky mechanism indeed. So if you consider that CFD's charge an interest of JBAR + 2, (+- 7%) DAILY!! - so compounded around 9% per annum give or take, your stock would have to outperform that amount.
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Super Contributor
EXTREMELY cheap! less 4% earned on the your profits (and available for tax.) Less dividends earned. EXTREMELY cheap finance on a risk asset. Less than most will get on a poperty loan (bond.) BUT - a caveat - with leverage comes risk!! Fail to manage that risk - and you get carried out in a body bag.
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Super Contributor
Not a fan of Cfd,still trade SSF. Financing at JIBAR+2% is still cheaper than prime rate.
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Not applicable
No ways cheaper than a bond (an existing bond, mind you - I am not comparing stocks to property). A good bond charges you say prime - in today's market, that is 8.5% - compounded daily as well - so let's just compare the annual interest rate. 7% vs 8.5%. The 7% is on your exposed amount, the 8.5% is on your principle. So, on 100k, I pay R8500 vs R7000. But, if my stock goes up by 21%, then I am paying the same. Anything over 21%, and the CFD becomes more expensive. Nobody is doubting the cost effectiveness of a CFD over a short term, but 8 months is not really short - and if you want to use them to gear your portfolio longer term, then not a cheap option at all. A 50% growth in your stock will result in interst more to the tune of 10.5%, for example.
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Super Contributor
Not at all. Your stock is easily realisable - it is liquid and cheap to trade. Your house is not. You choose to carry the additional exposure at a higher price and higher risk. You could just as well clear it and moderate your risk profile. Alternatively - buy out the additional risk with the proceeds/profits of the position,; thereby moderating risk. The point of purchase needs to be compared to the point of purchase of the property; Not the value position "n" months hence. Since you are paid out your profits - (free of all costs) it is really up to you to continue to raise your exposure level. Sure - the bank structures it such that this is the easy (and automatic) option, but that's what banks do. Property "finance costs are much higher that one thinks: tax efficiency considerations / life assurance / bond assessment, origination, ... fees (secindary costs of investment whch reduce the capital being financed: rates + taxes/insurance / life assurance / vacany / security...) CFD's are cheap - but one MUST manage them properly!
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Regular Contributor
Skaaptjop, Your maths is correct, but your reasoning is wrong. You cannot compare a 100k on the bond with a 2000k share exposure. Use your 100k example. With a CFD, to get a 100k exposure, you only need a 5k margin (at IG Markets). Although you pay interest on the 100k exposure, you only “depositâ€� 5k - your 95k remaining in your account still “earnâ€� you interest. Using your numbers, the interest cost for a 100k exposure will be +- 1.5%. If you do the sums now, you’ll get a very different answer.
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Not applicable
SO actually you are saying my reason is right, but my maths is wrong :) - but sure, point taken, you can offset the interest earned on both the margin and your free cash.
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Not applicable
my point is related to borrowing against an existing bond. I have been doing this for almost 5 years now, when I took out the surplus cash and bought listed property shares with it. My holdings are up 40%, and I have earned roughly the equivalent in divs to pay off the interest portion in my loan - but if I had done this with a CFD, it would be a whole different ball game - my CFD finance charges now, would be around 13% per annum on the initial loan amount
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Regular Contributor
You need to make roughly apositive 1.5-2% on the underlying to break even or is my approximate maths wrong? That to me where CFD proves to be trading instrument as you need to cut your losses otherwise the interest kills you if you sit around and it does not go your way or against you.
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Not applicable
Topix So what happens on the 100K if the trade goes against me within a week or lets say a month if the share drops by 10%? lets say the value of the share is R100 (or say 10000c)and I purchased the CFD for R5000. How will my balance be in my account. Just simple arithmetics will do
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Super Contributor
with SBK the costs are about 1.5% (0.7% in + 0.7% out) + interest paid,
so if held for a week you'll only see the 1.5% cost, as you can see from above as time goes by the 2nd half of the formulae starts to make a signifcant difference.
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Regular Contributor
The discussion is about the interest costs of CFDs. – expensive or not. To answer your question, if you buy any asset (house, car, share, CFD, etc) for 100k and it devalues by 10% you will be left with an asset value of 90k (simple arithmetic).
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Super Contributor
The point is you could buy in your loan position with your profits and retain your original funding level. (ALSO - as the stock value climbs, the CFD writer raises the initial margin and thereby serves to ameliorate this effect to some degree, even is you do not switch back into the underlying share.)
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Super Contributor
In simple arithmetic. If you took out 1000 CFD,s on SOL a year ago at 350 and sold yesterday at 380 this is the result.Cost in R1400(.4% of exposure R350000)and R1520 cost out and approx R26000 in interest giving a total of approx R29000. Income would have been R30000 (capital) + R15700 (taxable dividend) giving you a nett R16700 profit on a exposure of R36500 (10% margin) or R54750 (15% margin) giving a return of 49 and 31% respectively. I have not allowed any income for interest received on margin and dividends for simplicity. This I've done to show that a CFD can be held for a year or longer if it performs at about 2% more than the interest charged even if it does not pay a dividend you still don't loose. I find 3 to 4 months the most profitable, especially if I can strip a dividend as well
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