Something really does seem seedy that if I invest $2500, that I'll make above 50k if the stock doubles. Is it really that easy?
Looking at the opposite side, yes my investment can vanish from just a small drop in the price however I have funded my account enough to hold it up even if it hits the 52 week low.
I am quite new to CFDs but my intuition tells me this one will work out. Am I missing something? So my question is: Is CFD a viable option for long-term trading?
CFDs should not be used as a buy and hold strategy (which is risky enough doing with shares directly). However, with proper money and risk management and the proper use of stop losses, a medium term strategy is very plausible.
I was using CFDs in the past over a short time period of usually between a couple of days to a couple is weeks, trying to catch small swings with very tight stops. I kept getting wipsawed due to my stops being too tight so had too many small loses for my few bigger wins. And yes I lost some money, almost $5k in one year. I have recently started a more medium term strategy with wider stops trying to catch trending stocks. I have only recently started this strategy and so far have 2 loses and 3 wins.
Just remember that you do get charged a financing fee for holding long position overnight, but for short position you actually get paid the funding fee for overnight positions. My broker charges the official interest rate + 2.5% for long positions and pays the official rate - 2.5% for short positions.
So yes CFDs can be used for the longer term as long as you are implementing proper money and risk management and use stop losses. Just be aware of the implications of using margin and all the costs involved.
Yes it is viable but uncommon. As with everything to do with investment, you have to know what you are doing and must have a plan.
I have been successful with long term trading of CFDs for several years. It is true that the cost of financing to hold positions long term cuts into profits but so do the spreads and comissions when you trade frequently. You need to use the benefits of CFDs to your advantage: variety of instruments, being able to hold long or short positions and leverage.
What I have found works is a portfolio that is has overall low volatility even if its components are significantly leveraged and/or volatile. I backtest portfolios with my main focus being the maximum drawdown I can safely accept. Provided you can generate a return on your investment that exceeds the financing cost and can manage drawdowns without a margin call, there's no reason this can't work for you.
Note: I've found it critical to set up stop losses and stop endries (especially on volatile short positions) to ensure my portfolio doesn't drift.
There are additional advantages of this strategy from a tax perspective. In my case, holding CFD contracts long term are unrealised capital gains so they aren't taxed. However, the financing costs are realised losses so are tax deductable. Of course it may be different in your jurisdiction so check with a tax accountant.
Something really does seem seedy that if I invest $2500, that I'll make above 50k if the stock doubles. Is it really that easy?
You only buy or sell on margin. Think of when the stock moves in the opposite direction. You will loose 50k. You probably didn't look into that. Investment will vanish and then you will have debt to repay.
Holding for long term in CFD accounts are charged per day. Charges depends on different service providers.
CFD isn't and should not be used for long term. It is primarily for trading in the short term, maybe a week at the maximum.
No, CFD is not viable as a long term trading strategy.
You have a minimum margin to maintain, and you are given X days to top up your margin should you not meet the margin requirements. Failure to meet margin requirements will result in a forced sell where you are no longer able to hold onto the stock.
A long term trading strategy is where you hold onto the stock through the bad times of the company and keep it long enough to see the good times. However, with CFD, you may be forced to sell before you see the good times. In addition, you incur additional lending charges (e.g. 4%-6%) for the ability to leverage.
it is pretty much the same as a normal margin loan but cheaper because you don't own the underlying share.the if the margin is $1000 at 5% you could borrow $20000 in total so the actual amount would be $19000 in total that you would have to pay interest on so at the moment it is 5.1% which is $19000x5.1% /365 days =$2.66 a day and if the share price rises you don't pay extra in interest costs unless you have borrowed more.it still stays at 2.66 a day until you have sold the shares
Yes it is viable as long term!!
BUT...
The average yearly return for the Nasdaq-100 for the last 20 years is 15%!! If you subtract the financing cost for the CFD (my broker is 4%) it gives you about 11%. You can add 1% dividend yield to that. That's 12% return!! As you earn more you can compound in more contracts. Make sure you keep your buffer. Soon enough you can have a very large exposure.
The market right now is in euphoria. But a Trump impeachment can be very dangerous thing..
Happy investing!!
