6

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?

3

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.

  • Thanks Victor. Do you know if the interest rate is multiplied/compounded if you hold it long term? Or is it a 2.5% each night in your case? – Francis Kim Mar 20 '14 at 1:25
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    @FrancisKim - in Australia our official rate is 2.5%, so for long positions kept overnight the rate I would pay would be (2.5% + 2.5%) 5%/365days or 0.0137% for each day I hold a position overnight. The rate would be applied to the face value of the security not the margin amount. For example, if you bought 1000 share CFDs of a stock priced at $10 and margin of 5%, you would pay the interest based on $10,000 not $500 (your initial margin). The interest does not compound. If the share price rises you would pay more interest but if the share price drops you would pay less interest. – Victor Mar 20 '14 at 2:44
3

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 about 4 years now. It is true that the cost of financing to hold positions long term cuts into profits but so do the spreads when you trade frequently. What I have found works well for me is maintaining a portfolio that is low volatility, (e.g. picking a mix of positions that are negatively correlated) has a good sharpe ratio, sound fundamentals (i.e. co-integrated assets - or at least fairly stable correlations) then leveraging a modest amount.

2

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.

1

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.

Have a look at the wikipedia entry and educate yourself.

  • 1
    I have looked at the opposite side, just in the next sentence. I do understand that it's like an elastic band that amplifies both the profit and loss and obviously I've set stop loss in the right place. – Francis Kim Mar 18 '14 at 11:03
  • @FrancisKim - No you haven't explored the other side properly. What will you do, if you don't take a profit for months and continue loosing money ? Most CFD traders loose money and rarely make profits. – DumbCoder Mar 18 '14 at 11:06
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    That doesn't really explain WHY it shouldn't be used for long-term versus short-term. – Francis Kim Mar 18 '14 at 11:07
  • @FrancisKim - Read my answer and pay proper attention to the second paragraph. And better go to CFD dealer website and check the charges. – DumbCoder Mar 18 '14 at 11:09
  • Ok, I better ask them. – Francis Kim Mar 18 '14 at 11:14
1

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

  • That is actually incorrect, the interest rate is applied on the full $20K not $19K, and also if the share price goes up or down the interest rate applies to the new face value of the shares. – Victor Feb 8 '18 at 0:19
0

Yes it is viable as long term!!

BUT...

  1. Invest in something with low financing cost, low margin requirement and low volatility!! CFD index investment like Nasdaq-100 or S&P-500 come to mind.
  2. Make sure you only give yourself a good buffer for a downdraft. Basically a buffer for a 10% fall is good. 20% is better!!!
  3. Do a trailing stop. IF the broker does not support server-side trailing stop, forget it!!

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!!

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    The Trump euphoria was certainly not a factor when this question was asked, it it won't be a factor in the future. Do you think this answer will be relevant in a few months or years? – NL - Apologize to Monica May 22 '17 at 15:00
  • Only the sentenc about Trump will not be relevant. I just wanted to give my real quick current take on the market right now. I'm sure the average yearly return will not change much in a few years. – Renato May 22 '17 at 15:20
  • Also the financing rate might go up as interest rates also go up.But it will always be worth it in my opinion. – Renato May 22 '17 at 15:26

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