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Online Share Trading

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trading instruments defined

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Not applicable
Here we go - my 2c contribution for the month. A quick summary of the instruments available, and my personal thoughts on their use / suitability. 1) Index Futures Contracts. You have 2 to chose from. ALSI - the only way to day trade, IMO. Everything else is too expensive for the daily returns and the risk reward yield. ALMI - 1/ 10th the ALSI. Useful for index trading across multiple days - like Simons' lazy trading system. I personally am not a fan of index trading, but that is my own preference and system - others swear by it. My dislike stems from the fact that I don't like to risk too much on a single trade - and I don't trust the frequency of index setups vs the expected rewards to make my annual targets. 2) CFD's. My instruments of choice. No good as a day trading instrument (too costly vs risk / reward) but for those of us who do not like to be glued to a computer screen all day, they are perfect. They are transparent, don't have accelerated time decay (they do have time decay though, but unlike warrants, the interest is constant) and they are good for scaling in and out of positions (selling bits at a time) - oh - and massively important - you can set stoplosses. The downside, is that they are over the counter instruments - which means you have counter party risk. This is not really a problem if you are using OST or other big banks (I use Nedbank) - but you should be careful if you are using IG or GT247. The problem with counter party risk, is that your contract is with the counter party. Your capital, margin, trade profits and position is not guaranteed. Just ask those who traded with Dealstream. You see, what happens is, as these guys get more confident - they offer more and more illiquid instruments. The reason this is a problem(As was the case with Dealstream) is that it takes 1 guy to make a big bet on illiquid rubbish, like control instruments (I think that was the one, wasn't it?). So the guy is on the wrong side of the trade - the buyers all pull out - and he is faced with a margin call of something crazy - like several millions, which he can't do and the position has to be closed out. The guy disappears, and Dealstream, which has to cover the trade, are out of pocket. IG markets in Europe was nearly bankrupted like this several years ago - they had to get bailed out. Not a problem now, I hear you GT247 pundits say - but remember they are owned by Purple Capital - listed on the JSE, and they posted a profit ... when exactly? 3) SSF's. Good for those with deep pockets because they are guaranteed by the JSE - no counter party risk. What I don't like about them, is that they are 'bulky' instruments. They are difficult to scale in and out of, because of the contract batch sizes. Also, contract rollover is an issue (IMO), in that an SSF is really a short term instrument with expiry. Technically, you are not supposed to be out of pocket at rollover date, but practically, you incur trade costs. Worse though, is that SSF's no longer have stop losses and it is a bit of a mission to determine their value vs the underlying instrument 4) Warrants. For the old timers. I don't like them. They are complicated, illiquid and have time decay. They do have the advantage that your portfolio will survive the 'black swan' scenario. Just imagine if you were long ACL just before Kumba decided to cancel their iron ore supply - or, more recently, if you were long ABIL. Your exposure with a warrant is limited. The other problem with warrant is that they are illiquid, so, while they do support stoplosses, the stop is on the warrant, so if you shoot through your stop level on the underlying instrument, and nobody trades the warrant, (highly likely, given their illiquid nature), you will just shoot right through your stop. 5) Installments - honestly just a longer form of a warrant - with the same inherent risks and benefits. Hope this helps ...
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11 REPLIES 11
stores
Super Contributor
A great summary...Thanks...Was not aware of the historic IG problem.
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keng
Contributor
Am going to take some time to take in all you have imparted. However one thing that immediately hit home was your concern regarding IG. I have opened an account with them because they offer positions that Standard doesn't. I "trade" on my Standard account but Invest on my Investec account. One share in my investment account is TRU which I have held for some 20 years. When the price jumps "too much" I get worried and expect a pull back. Unfortunately Standard does not offer shorts on this particular share, IG does. From what I have gathered from your comment on IG I'm not sure which is the biggest risk the share or IG.
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Alonzo7
Frequent Contributor
Thanks - I prefer the CFD's as well (my Instrument of choice & I use Std Bank OST).
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Alonzo7
Frequent Contributor
Thanks - I prefer the CFD's as well (my Instrument of choice & I use Std Bank OST).
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Prestonmyhusban
Regular Contributor
Excellent posting but I got disagree with the instrument of choice. Cfd's is a big NO for more. I am interesting in trading shares and share trading strategy and not have to worry about counterparty risk and believe me, NO BANK IS TOO BIG TO FAIL. Simon did an excellent introductory video on warrants. I believe warrants are excellent tools to protect long term investment. As long as you understanding how the pricing of warrants works especially with the log normal distribution, this will put you one step ahead of the game.
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Not applicable
I am not saying IG is bad, I am just saying that they present a different type of risk. So the old analogy of all your eggs in one basket springs to mind.
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Rams
Super Contributor
skapie, too much mumbo jumbo there as usual...summarise choppie....anyway would have been easier for you to just post the link to the authentic stuff at justonelap?
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Rams
Super Contributor
skapie, too much mumbo jumbo there as usual...summarise choppie....anyway would have been easier for you to just post the link to the authentic stuff at justonelap?
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Preston
Super Contributor
Got to disagree. Skaap posting has incredible amount of substance. There is no valid substance behind your disagreement.
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Rams
Super Contributor
substance, dont know, did not read the post!
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Rams
Super Contributor
substance, dont know, did not read the post!
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