When do CFD's become expensive to hold?

[wattleido]

To those out there trading CFD's regardless of your trading timelines, when does it become costly in holding cfd's versus the underlying stock? And I am not meaning in terms of adverse movements in markets but more the costings of holding the the instruments? Any comments will be appreciated.

[SimonPB]

well from day 1 as holding the stock has no carrying costs ..

[THRESHOLD]

Actually never (AND Always.) Properly used - you are given the opportunity to borrow money at prime to buy "risk" assets. Well that's a great deal. The problem is with managing the risk that comes with this kind of leverage. No matter how mature you set out to be - you always wind up dong something stupid. Or perhaps I should say "I" not "you."

[Terra]

The way I see it is, if you hold a long position you pay 8% on your exposure, and a short position of the same exposure you receive 5.22%, and then there is also interest on initial margin of 5.22%. So they sort of cancel each other out on the long run...unless your a perma-bull....

[wattleido]

Thanks for your comments. Looking at trading some single stocks and my system so far in testing gives holing period of anywhere from a few days to a few weeks maybe at most a month so fishing for best instrument to do this with.

[#6]

remember that CFD interest rate calculations are on your entire exposure - so as the stock goes up, your proportional borrowing costs increase. A basic rule of thumb is to take the JBAR rate +- the premium your broker charges, divide by 365, and apply the daily rate to your total exposure.

[#7]

And Simon, 2 things - a CFD costs 0.9% (buy and sell) vs 3% for a stock. And you should also consider that your margin earns interest, as does the excess cash that is not tied up (if you were comparing like for like exposure between CFD and stock)

[SimonPB]

no, CFD is 0.7% +R114 buy and sell .. Stock (for over R10k) is about 1.8% buy and sell ..

[THRESHOLD]

.5% if both legs are in the same trading session. You earn interest on your deposit at money market rate - but you do pay interest on the full share price at 9% (no reduction for you margin.) Also - unlike a true loan you pay interest at (9% - your money market rate) on any gains in the stock price. So your position becomes progressively more expensive as the share price rises and your risk elevates (the bank isn't playing games.) (The postion hlds in reverse on the put/short side.)

[THRESHOLD]

So kind of a restatement of SK above. There ain't no such thing as a free lunch.

[Terra]

Jip..after tax, VAT, toll gates, brokers etc...you've got 30c left for every buck you make...

[#12]

Am I right in saying with a CFD: Closing price yesterday was 1840, day before 1840, today its at 1840. Because the P/L is calculated with the CFD - spread, it seems every day I'm losing R 250, on a price that doesnt move. Is this right?

[THRESHOLD]

Value taken at close.

[THRESHOLD]

But there is a bank spread incorporated. So you lose that.

[THRESHOLD]

That is .35% . BUT only upon transacting. So not every day.

[SimonPB]

there's the spread .. you buy at offer and get valued at bid ..

[THRESHOLD]

But that is native to the share - so not the bank's spread.

[#18]

How much does SSF's cost. Does standard bank do a course for SSF's?

[WES]

Of all the derivatives I like CFD's the most. Warrants reduce over time, so eventually you will lose, SSF forces you to buy a too big an exposure because 1 contract equals 100 shares plus the roll over will cost you. I think you must compare derivatives with each other and not the share. The derivative gives you gearing, it is two different senarios, you cant compare cost between the derivative and the share.

[#20]

thanks all, I see where my mistake was. The -ve spread is only calculated only the sale, but the P&L is calculated on the daily closing price. So one wouldnt lose daily.