CFDs or Margin Loans – Which one is better?

October 18, 2010 — 3:48 am

In the early days investors needing to borrow money to trade had few choices, either borrow money from your bank to purchase shares or call up your stockbroker and apply for a margin loan.

In 2003 traders and investors in Australia got a further choice, CFDs. Since their introduction the industry has changed, CFDs being a simple form of margin lending have grown to be the fastest growing derivative product in the country, outstripping the growth seen in the warrants market during the mid 1990’s.

No longer does a retail investor need to apply for a bank loan or deal with costly full service brokers. CFDs have revolutionized the financial services industry, retail investors can now open a Contract for difference account on-line in minutes and be up and trading before the conclusion of the day, executing all of their orders in real-time over the internet.

Unlike margin lending CFDs are usually traded over the internet with the investors portfolio being marked to market in real-time during the trading day, this is substantially different to the end of day portfolio revaluations employed by margin lenders. Real time portfolio margining means that traders can properly accurately manage risk during the trading day rather then needing to wait for statements to be created at the conclusion of the trading day.

Similar to equities bought using a margin loan CFDs also offer the holder the capability to receive a dividend, however in the majority of cases franking credits aren’t passed on to the holder of a Contract for difference unlike that of a margin loan. The main reason franking credits aren’t passed on when holding a CFD is because the purchaser of a CFD holds an over-the-counter derivative contract and not the real share. Not having the physical share whilst owning a CFD position also means that the owner of the CFD isn’t entitled to voting rights in the listed corporation over which the Contract for difference is based. Numerous CFD traders only hold their positions open for a short time frame and are not interested in voting rights or franking credits but instead have an interest in making a return from the short term price changes of the CFD.

One of the most significant advantages of Contracts for difference is that traders can always sell them as easily as they are able to buy them, this means is that going long is just as straightforward as going short allowing traders to gain in falling markets. With traditional margin lending short selling is tricky and near impossible.  

CFDs are comparatively cheap compared to margin lending, typical brokers offering margin lending will charge 0.50 percent whereas a normal CFD provider will charge 0.10 percent. One thing to be cautious of are the interest levels charged by margin lenders and CFD providers. It’s vital to note that margin lenders will charge interest only over the quantity borrowed whereas Contract for difference providers will charge interest on the full notional worth of the position, however, CFD financing charges tend to be lower. Financing rates are essential to take into account when comparing both products, however, this is less important for Contract for difference traders that only hold their positions for a short period of time.   

Typically Contracts for difference offer traders extra leverage than regular margin loans enabling traders to obtain a superior return on their investment. You ought to also be aware that higher leverage also can lead to a rise in risk, this is normal with leveraged products. The leverage offered for CFD buying and selling can be as much as 100 times while margin lenders will normally only offer around 10 times leverage or less. The leverage obtainable will vary between each CFD provider and margin lender. Leverage is often determined on a stock by stock basis taking into account the market capitalization of the stock and liquidity.  

As Contracts for difference are an over-the-counter derivative product it is important to note that you do not own the underlying share or instrument over which the CFD is quoted, this also means that you are not able to transfer your position to a different Contract for difference broker or stock broker, you can only deal with the Contract for difference provider that you opened the position with. Whenever you buy stocks on a margin loan the equities are held in your name this means that you can always move them without restraint from one stock broker to another. 

CFDs suit short to medium term active traders seeking to exploit market movements in both directions, however, margin lending is much better suited to people who are looking long-term investment options and wish to take advantage of the income tax benefits franking credits provide, as well as voting rights. It’s always essential to keep in mind that both products are leveraged, you must make sure that you adopt a suitable money management plan and never utilize the leverage offered to its full capacity.

Trading Margined Products

Oct 22nd, 2010 by Master

A CFD or Contracts for difference is an tool that allows speculators to speculate on the direction of stocks or indices without having full ownership of the underlying contract.

Make sure you use the right strategies when dealing with Contracts for difference. It stands for CFDs investing. Pair trading is the most common trading technique. Even though gains are not guaranteed with pair trading the risk is noticeably lower. This technique is an arbitrage technique, which means balancing a long deal versus a short deal. Pair investing allows investors to diversify the risk. By pair trading, a trader can diminish the exposure.

It is a contract defined as an agreement to an exchange of a difference between the opening and the closing price of a financial mechanism of a traded asset stocks, indices, and commodities online. It is a derivative mechanism from stocks, commodities, futures, forex, etc.. CFD trading offers a broad range of markets and it is very effortless to invest. It is very effortless to sell online shares, commodity futures, stock indices etc, similarly it is effortless to buy it. trading is really easy with CFDs and offer access to a wide range of products.

the shares, indices, commodity futures are investment instruments that allow you to access online price movements of shares, commodity futures or indices without actual possession of mentioned shares online, commodity futures or indices. CFDs on stocks, indices, commodity futures are perfect tools for hedging the value of assets, and also for a speculative trading with a high financial margin, and with forcible tools for an efficient and safe account administration!

As everything is done automatically it is extremely effortless to deal. Certain risks have to be assessed before you start trading cfds trading! The technology of trading is fully subordinate to its function that is to allow investors a valuable speculative and aggressive trading on a profit, with a high margin, with the possibility of using a safe money administration.

It also allows you to benefit from any market conditions providing you deal the right way. As you can go long and short it is easy to benefit from upward and downward market moves. sell a CFD on a share you do not own). Unlike traditional share investing one can go short and long with CFDs.

To investors, the trading on stocks and commodity futures allows a quality hedging of their assets, a valorization of a disposable capital and a risk administration.

Analyzing almost 10 million tweets, research finds public mood can predict Dow days in advance

October 19, 2010

Enlarge

A graph of Dow Jones Industrial Average values (center, blue) and tweets identified with a "calm" mood during a time series (bottom, red) running three days prior are overlaid in the top graph to show gray areas of significant overlap.

Measurements of the collective public mood derived from millions of tweets can predict the rise and fall of the Dow Jones Industrial Average up to a week in advance with an accuracy approaching 90 percent, Indiana University information scientists have found.

More information: The research paper is available for download here.Researchers at IU Bloomington's School of Informatics and Computing found the correlation between the value of the Dow Jones Industrial Average (

DJIA

) and public sentiment after analyzing more than 9.8 million tweets from 2.7 million users during 10 months in 2008.

Using two mood-tracking tools to analyze the text content of the large-scale collection of Twitter feeds, Associate Professor Johan Bollen and Ph.D. candidate Huina Mao were able to measure variations in public mood and then compare them to closing stock market values.

One tool, OpinionFinder, analyzed the tweets to provide a positive or negative daily time series of public mood. The second tool, 

Google

-Profile of Mood States (GPOMS), measured the mood of tweets in six dimensions: calm, alert, sure, vital, kind, and happy. Together, the two tools provided the researchers with seven public mood time series that could then be set against a similar daily time series of Dow Jones closing values.

The researchers then correlated the two sets of values -- Dow Jones and public mood -- and used a self-organizing network model to test a hypothesis that predicting stock market closing values could be improved by including public mood measurements.

"We were not interested in proposing an optimal Dow Jones prediction model, but rather to assess the effects of including public mood information on the accuracy of the baseline prediction model," Bollen said. "What we found was an accuracy of 87.6 percent in predicting the daily up and down changes in the closing values of the Dow Jones Industrial Average."

By implementing a prediction model called a Self-Organizing Fuzzy Neural Network (SOFFNN) similar to one already used to successfully forecast electrical load needs, the researchers were able to demonstrate that public mood had the ability to significantly improve the accuracy of the most basic models currently in use to predict Dow Jones closing values. Bollen described this particular SOFFNN as a five-layer hybrid neural network with the ability to self-organize its own neurons during a learning process that included information of past Dow Jones and public mood time series values.

"Given the performance increase for a relatively basic model such as the SOFNN, we are hopeful to find equal or better improvements for more sophisticated market models that may in fact include other information derived from news sources and a variety of relevant economic indicators," he said.

The researchers found the OpinionFinder positive/negative sentiment input had no effect on prediction accuracy, while the Calm and the Calm-Happy combination of the GPOMS had the highest prediction accuracy.

"In fact, the calmness index appears to be a good predictor of whether theDow Jones Industrial Average goes up or down between two and six days later," Bollen said.

The odds of the prediction accuracy rate of 87.6 percent being sheer chance were then calculated for a random period of 20 days and determined to be just 3.4 percent.

Provided by Indiana University (news : web)

GAIN Capital to Acquire the Retail Forex Business of Capital Market Services, LLC

NEW YORK and LONDON, Oct. 19 /PRNewswire/ -- GAIN Capital Holdings, Inc., a global provider of online trading services specializing in foreign exchange (forex or FX) and contracts for difference (CFDs), has reached an agreement to acquire the retail forex business of Capital Market Services LLC ("CMS Forex"), pending regulatory approvals and other closing conditions.

GAIN Capital, through its regulated subsidiaries, agreed to purchase the retail customer accounts currently held at CMS Forex's regulated subsidiaries in the United States, Bermuda, United Kingdom and Japan.   The transfer of CMS Forex's U.S. and Bermuda customers was completed on October 15, 2010.  The transfer of the retail customer accounts of CMS Forex's regulated subsidiaries in the United Kingdom and Japan is scheduled to be completed in the coming weeks, pending regulatory approval and other closing conditions.

The agreement comes as a result of CMS Forex's decision to cease providing retail forex trading services. CMS Forex will continue to offer FX liquidity services to institutional clients worldwide and act as an introducing broker of retail business to GAIN Capital.

"We are pleased to be in a position to offer CMS Forex's retail customers around the world the ability to continue trading forex with an established, well capitalized firm," said Glenn Stevens, CEO, GAIN Capital.  "Our goal is to provide these traders with uninterrupted service, and we will work closely with CMS Forex's team to ensure a smooth transition of their customer's accounts and assets to our retail division, FOREX.com.  We are confident that CMS Forex's customers will be satisfied with the robust offering available at FOREX.com, including our industry leading trading tools, research and educational resources, as well as our focus on providing superior customer service."

"When we made the strategic decision to exit the retail FX market, our major priority was to find our customers the opportunity to trade with a firm equally committed to providing superior technology offerings, educational resources and customer service," commented Eugene Hawkin, president and COO of CMS Forex.  "Having engaged in discussions with a number of firms, we felt that GAIN Capital would provide our customers with the quality of tools and services they have received during their time with CMS Forex."  

Read more

The Basics Of Day Trading

People all around the world seem to have a keen interest in the global financial markets. There is only a small group of people out there that trade everyday with trading instruments like junk bonds, spot Forex, CFDs or better known as contracts for difference. These are the your real day traders, they are at it tooth and nail everyday.

These people have a difficult job, they aren’t thinking about tomorrow they are under pressure to make daily profits. The shorter time frames make it tricky to buy and sell for maximum profit. They don’t want to hold positions overnight, so their entry points must be accurate. Talk about pressure.

The great thing about short-term trading is that, there are many markets to choose from, some people like stocks, commodities, and let’s not forget Forex. With Forex, you have a larger window to pick the times you want trade. You could have a day job then come home and trade the Asian session. Some people have a favorite currency pair, and trade it during a session where more participants are in is another option. Working in an online Forex trading room is another way to become a day trader, you can learn the ropes from others with more experience.

To be a successful FOREX day trader, however, there are a few things you need to keep in mind. For one thing, you must be conscious of unexpected news that is always leaking into the market, and you must learn to use tight stops. Accurate Forex signalsare a must when you are pushing yourself to trade within a limited time frame, as is the case with all day trading.

One great thing about getting started in trading is, you might want to turn this into a full-time profession. There are many people who start out, and suddenly realize that have a knack for this daily speculation. They really enjoy watching the price action throughout the day, and enjoy taking short-term profits out of the market on a daily time frame.

A key factor is most of the crowd wont succeed at this, and its not because the markets against them. Its just simply they don’t have enough experience, and the right information. You simple have to be good to win at this period. Remember you’re not in your trades for weeks or months, you don’t care about all the hills and valleys the markets produce over time. The last thing you want to do is hold a position overnight. You are a focused day trader and you want your profit today, not tomorrow. Spot Forex is very popular for this kind of action, lots of volume and plenty of currency pairs to trade, if you pick this career the opportunities and rewards are very rewarding to the knowledgeable trader.

Looking to find the best advice on secrets of Forex trading hop aboard.

FOREX Trading with CFDs

There is lots of knowledge and interest out there about FOREX trading. FOREX (Foreign Exchange) is simply purchasing a currency at one price and selling it at another price to make a profit. Currency markets are well known around the world, and your average Joe will have exposure to them when you go travelling to Europe or Asia as you will need to change your currency to be able to purchase things in the new country. You also may have exposure to foreign exchange markets if you ever made a purchase from overseas and had to calculate what the cost of the product was in your local currency.

There are many providers out there that let you trade FOREX with CFDs. You can simply open an account and say you want to purchase x amount of dollars and sell x amount of Euros and hey presto, it all happens automatically.

Contracts for difference (CFDs) work as a form of financial derivative that creates a contract between two parties that states that one party will have to pay the other the difference in the value of the underlying asset that the contract was made on.

What this means is that you can make a contract saying you will buy the USD at $1.10 Canadian Dollars, and if it is higher than that (say $1.20 Canadian Dollars) at the time you decide to sell it, the other party will have to pay you the difference, but if it is lower (say $1.00) you will have to pay them the difference. This is basically the same as trading the currency its self.

FOREX trading accounts will also allow you to purchase on leverage (borrow to make bigger purchases than the actual amount of cash you have). CFD accounts also let you do this.

As you can see, CFD accounts allow you to do almost everything that a standard FOREX account could do, but they also offer so much more. Like the ability to trade shares in almost any market, the ability to trade indices, commodities and many other different options.

So I ask you, why would you trade FOREX when you could trade CFDs?

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Read more about contracts for difference, CFD Trading System and Online CFD Trading

Managing Risk When Trading In CFDs

CFDs or a contract for difference is a trading toll that you can use to trade forex. It works on the principle of leverage. Leverage is the most significant reason as to why forex is risky or why people say it is so. Leverage allows you to deal in a trade with only a percentage of the amount. So if the trade deal is for $1000, you can get into the deal for around $200. Although this is beneficial as it allows you to get into big deals with small amounts, you always have to be on your toes when dealing with leverage and CFDs. The leverage factor alone is not dangerous as it in a way amplifies your loss. However, people have many misconceptions about the entire concept and they make wrong calculations leading to losses.

The Risk With Leverage

Leverage in no way means that if you invest some money, you will lose more than you invest. All it does is allow you to deal with larger sums of money that would otherwise have been out of your reach. The risk comes in when people begin to think that with leverage, they will get rich overnight or will suddenly make big bucks on a small amount. This makes people pump in more money than they should and puts them at a risk. The other risk with leveraged products is that a small price increase will result in large profits as you are dealing with a large number of CFDs, but a decrease will also mean huge losses.

How To Avoid Risk

When you trade CFDs, you have the advantage of using stop losses. Understand how they work and how they will help you so that you can put them to good use. With a stop loss, you can set a point up to which if the exchange rate falls when you will automatically withdraw without further delay. If the rate goes up, you can use the advantage of the trailing stop loss to take your previous stop loss point up in relation to the new rate. This will help you minimize losses and decide what your losses can be beforehand.

Do not go running around looking for a gold mine, this is a gradual investment and will take time to bear fruit. So, have patience and do not keep switching mindlessly. Also, do not chase the lowest margins possible, the greater the leverage, the higher the percentage of loss.

If you have to switch your forex, trade in small CFD deals and get an idea of the new investment instead of plunging in blindly. Risks sometimes payoff but take only calculated risks. Study the market and all possible sources before going into a new deal, this will give you a good idea of its worth.

Like in speculations, never trade with the money that you need to live on or your savings. This one risk is always dangerous.

Develop a CFD trading method, when you deal with CFDs, you should have a proper method of investing that will minimize any risk to a great degree. 

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Mercedes Kent - About the Author:
To find all the other information regarding dealing with CFDs and foreign exchange, visit www.igmarkets.co.nz, they can guide and help you to make the right CFD investments