Trading CFDs with Trader Dealer ABN (AFSL NO )

Transcription

1 Trading CFDs with Trader Dealer ABN (AFSL NO )

2 Pages 1. Overview 3 2. What is a CFD? 3 3. Why Trade CFDs? 3 4. How Do CFDs Work? Margin Commission Financing Corporate Actions Leverage Short Selling Further Examples Trading Direct Market Access (DMA) CFDs Some Trading Styles Risk Management Trade Execution Why Trader Dealer for CFDs? Frequently Asked Questions (FAQs) Trading CFDs with Trader Dealer

3 1. Overview This booklet will provide an overview of trading CFDs with insights into the mechanics of trading CFDs, short selling, trading techniques and the utilisation of Trader Dealer s pricing structure to get the most out of your trading dollar. Dealer CFD Desk on What is a CFD? A CFD (Contract for Difference) is an agreement to exchange the difference between the entry price and exit price of an underlying share. For example, if you buy a CFD at $10 and sell at $12 then you will receive the $2 difference. If you buy a CFD at $10 and sell at $8 then you pay the $2 difference. When you enter a CFD contract you are not buying the underlying equity, even though the movement of the CFD is directly linked to the share price. Because you do not own the share, you are only required to provide a deposit to your CFD provider which could be as low as 5% for Australian shares. This means you can trade up to 20 times your initial capital. The pricing of CFDs is identical to the pricing of the underlying share, and like buying and selling shares, commissions are calculated on the transaction. Most CFD providers offer a percentage based commission structure with 0.10% being considered the market norm. Instead of charging on a per trade basis, Trader Dealer tallies up the total value of all trades this in more detail shortly. Simplicity: CFDs mirror the price and liquidity of the underlying market. Hedging: CFDs allow you to employ more advanced strategies such as hedging your existing share portfolio. Dividends and Corporate Actions: issues which may occur in the underlying instrument on which the CFD is based. Cost: Trader Dealer provides the most competitive brokerage structure on the Australian market. Trade $100,000 of stock for just $66. But that s not all, trade as many times as you like in the one stock on the one side of the market and we ll book it as one trade at the end of the day. 4. How Do CFDs Work? 4.1 Margin CFDs are traded on margin and there are two different forms of margin that may be payable when trading CFDs Initial and Variation Margin. Initial Margin An Initial Margin is a deposit used as collateral to open a CFD position. The margin is held by the CFD Provider to ensure you can meet your obligations. A margin rate is expressed as a percentage and is calculated based on the liquidity and volatility of the underlying security. Margin rates typically range between 5% 50%. The margin requirement of a CFD position is calculated using the mark to market concept. This means that the current value of your position is assessed during each trading day. The 3. Why Trade CFDs? the over-the-counter (OTC) or equity SWAP market. Equity swaps were used by institutions to cost-effectively hedge their equity exposure. CFDs have become one of the most popular The popularity of CFDs has been driven by: Leverage: CFDs enable you to obtain full exposure to a share for a fraction of the price of buying the underlying instrument. CFDs require only a small initial margin as a trading deposit. The ability to go short : CFDs allow you to sell shares you don t own. This enables Additional margin amounts will be payable should you fail to maintain the required margin on your position. Calculating your Initial Margin Quantity x Price = Full Face Value 1000 x $10 = $10,000 Full Face Value x Margin Percentage= Margin Required $10,000 x 5% = $500 Your initial margin is $500 Page 3. Page 4.

4 Variation Margin In addition to the Initial Margin required to open and hold a CFD position, you may also need to have available an additional margin incurred by an adverse price movement in the market, this is known as Variation Margin. The Variation Margin is based on the intraday mark to market revaluation of a CFD position. 4.3 Financing When you trade on margin, you are placing an initial deposit to open the position and borrow For example, if you have a long position and the price falls then you are required to pay a Variation Margin large enough to cover the adverse movement in the value of your position. On the other hand, if you have a short position and the price falls, you would receive a Variation Margin equal to the positive movement in the value of the position. For a short position, you would receive 0.75% PA paid daily. 4.2 Commission CFD commission is calculated based on the full face value of the position: Full Face Value x Commission rate = Commission charged 4.4 Corporate Actions Holders of CFDs are able to participate in corporate actions, including share splits, dividends and rights issues. Dividends are received when a long CFD position is held overnight over the ex-dividend date. Conversely if a short CFD position is held over this period the holder of the CFD must pay the dividend. The dividend is credited the day the share goes ex-dividend. Holders of physical shares may be required to wait for up to 3 months before receiving a dividend. With a traditional provider, the below transaction will occur: $100,000 x 0.10% = $100 Your commission charge would be $100 for a $100,000 trade. 4.5 Leverage Leverage (or gearing) is like borrowing: it allows you to increase your potential return on a trade as you increase your exposure to the market. CFDs are leveraged products and can have a leverage ratio of up to 20:1, meaning that every $1 invested has the effect of If the $100,000 face value on the position was generated by completing 15 trades within the one stock, the CFD provider would charge you each time you trade, applying a minimum charge for each transaction. Assuming the minimum charge is $10 (some providers charge between $15-$20), the cost of the trade would blow out to $ Short Selling Unfortunately, markets and prices don t always go up. There are periods of time where prices fall and where going long or buying doesn t work. With CFDs you have the opportunity to Trader Dealer offers an alternative. going short or short selling. A $100,000 trade is charged at $66 even if you place 15 separate trades in the one stock on the one side of the market. This allows you to average into the market using smaller parcels - a strategy widely employed by professional traders. An example of our pricing in action is available on the Trader Dealer website, buy it back later at a lower price. In order to do this they may borrow the CFD from their CFD from the difference in the price they bought and the price they sold the CFD. second, hopefully selling at a higher price and buying at a lower price. Some examples may help. Page 5. Page 6.

5 CFD Example You saw that Lihir Gold (LGL) had broken key support and looked set for a pullback. You place a sell order for LGL shares at the current market price of $2.78. The face value of the trade is $97,300 and the margin rate on LGL is 10%. Therefore $9730 ($97,300 x 10%) is required as the Initial Margin to open the position. The trade is placed and you hold a short LGL CFD position with a face value of $97,300. The Trade in Detail Opening the trade - Going Short - Selling 35,000 Lihir Gold Price of Lihir (LGL) $2.78 CFDs sold Commission Total exposure Initial margin requirement (10%) Total outlay 35,000 $66 $97,300 $9,730 $9,796 Order Pad with Market Analyser Closing the trade Buying 35,000 Lihir Gold (LGL) Price of Lihir (LGL) CFDs bought to close position Commission $ ,000 $66 $3,434 Total outlay $9,796 When opening a short position you have received a cash payment for the full value of your short position and receive interest on this amount at the RBA target rate minus 2.25% pa. The overnight interest rate is calculated by dividing the per annum applicable interest rate payable by 365 (days per year). Assume that the price of LGL drops by 10c the following day to $2.68. If the position is closed including transaction costs. Financing received Return on total outlay However if the trade had gone against your initial view and you decided to close the position when LGL was trading at $2.82, you would have lost $1514 inclusive of costs. 4.7 Further Examples $18 $3, % On July 30th Commonwealth Bank (CBA) breaks from consolidation on above average volume signalling further upside. You decide to buy a parcel of 500 CBA CFDs at market price. You place an order to buy 500 CBA CFDs on the current offer of $ You monitor the market and as the day progresses CBA continues to look strong. Charting feature within Market Analyser You decide to top up the position if the stock rises above a critical resistance level at $ To place the order you simply open a conditional order using the Order Pad within Market Analyser. If CBA trades at $41.00 a market order will automatically be placed to buy CBA at a price of $ Page 7. Page 8.

6 Entering the trade - buying 1200 contracts of CBA Conditional Order Pad within Market Analyser Share price CFD contracts bought to enter Total exposure Margin requirement (10%) Commission Total outlay $ $49,440 $4,944 $44 $4,988 Exiting the trade selling 1200 CFD contracts of CBA Share price CFD contracts sold to exit $ $3,528 Commission Financing paid (received) $66 $22.43 $3,428 this process to ensure the stock breaks above the next 4 critical levels of resistance to ensure buyers are well and truly in control. By the end of the session you have built a position of 1200 CBA CFDs at an average price of $ You ve successfully pyramided your position Total outlay Return on total outlay days. $5, % Please note; brokerage is charged on a sliding scale based on trade volume. To view a full list of rates visit downside when trades don t go as planned. In the example below we consider a long trade that goes against the trader. CBA was trading at $30.00 and a trader could have the view that CBA was likely to rise. To enter a CFD contract you might place an order to buy 1200 CFDs in one parcel or in multiple parcels throughout the trading day, at an average price of $ Over the next 3 days the stock offers little direction, and at $29.20 you decide to exit the trade for a loss. CBA share price, shown in Market Analyser. long trade in CBA. Over the next three days, CBA continues higher moving up by $2.94 while the CFD contract was held. The details of the trade are shown below. Page 9. Page 10

7 Entering the trade - buying 1200 contracts of CBA Share price $30.02 CFD contracts bought to enter 1200 Total exposure $36,024 Margin requirement (10%) $3, Commission $33 Total outlay $3, Closing the trade selling 1200 contracts of CBA Market depth is available through Market Analyser. When dealing using DMA CFDs, you deal on the prices and liquidity of the underlying market. Share price CFD contracts sold to exit Total exposure Commission Financing Net Loss $ $35,040 $33 $15 $1, Some Trading Styles Momentum trading 5. Trading Direct Market Access (DMA) CFDs There are three types of CFDs available on the Australian market. 1. Market Made CFDs 2. ASX CFDs 3. Direct Market Access (DMA) CFDs maker you trade on their market, with their prices and liquidity. Transparency is an issue when dealing with such providers as the prices are not guaranteed to replicate the underlying exchange. Providers have the ability to increase the spread between the bid and offer, therefore costing you money. ASX CFDs are relatively new. They are exchange traded with the ASX novating the transaction between the buyers and sellers. Although a good idea in principal, the life blood of the market is liquidity and unfortunately, ASX CFDs lack this critical ingredient. From a statistical point of view, ASX CFDs account for less than 1% of the Australian CFD market according to Investment Trends. With Direct Market Access CFDs, you are guaranteed to be trading on the price and liquidity of the underlying exchange. Your order will be visible in the market depth and will be subject to the conditions set out by the particular exchange. From the example below, if you placed an order to buy BHP at $36.59 (level 7), your order would be behind two existing orders at that price level. DMA CFDs ensure transparency during execution and reduced trading costs. Trader Dealer offers Direct Market Access CFDs at the market s most competitive rates. when trading leveraged products. The concept of momentum trading was best explained in a famous book written all the way back in 1923, The Reminiscences of a Stock Operator by Edwin Lefevre. The book suggests that buying stocks that are making new highs, be it long side of the market makes sense. The book also explains the concept of pyramiding on correct. Averaging into a position is a widely known concept with the more traditional equity advisers very fond of suggesting to average down. The concept of averaging up is far less popular. It could be argued that having a view on the market, acting on the initial view by taking a position, then adding to the position as the market action supports the view is far more sensible than adding to a stock that is not performing in the way you thought it would. The down side to this trading technique can often be the cost of executing multiple trades throughout the day. This is true with the traditional CFD providers who charge a minimum amount each time you execute a trade. Most range from $10 to $20. Although it sounds reasonable on face value, this adds up when you re pyramiding into a position. With Trader Dealer you can trade an unlimited number of times in one stock, on one side of the market and only one brokerage charge will apply at the end of the day. Let s look at an example. Page 11. Page 12

8 Analysis function within Market Analyser Day trading example; You re bullish on QBE after the company released a report overnight suggesting that their Time Trade Description Time Trade Description of how the general market will take the news, you decide to buy some stock on the open and see how it performs throughout the morning. The price action supports your view so you continue to acquire stock as the price moves higher. Throughout the day you build a relatively large position in QBE because the stock has performed exactly how you envisaged. You decide to hold the position overnight and look to exit the trade the next day. Total value Bought 10:05am 10:15am 10:30am $96,389 $3,591 Buy 100 $20.00 Buy 50 $20.10 Buy 70 $20.07 Total value Sold 10:05am 10:15am 10:30am $99,980 $3,459 Here are the trade details: 11:00am 11:20am Buy 150 $20.28 Buy 2000 $ :00am 11:20am Trade Description Time 11:30am 12:03pm Buy 600 $21.00 Buy 150 $ :30am 12:03pm Buy 100 $ :05am 12:17pm Buy 280 $ :17pm Buy 250 $ :15am 12:40pm 12:40pm Sell 1000 $21.10 Buy 700 $ :30am 1:10pm Buy 500 $ :10pm Buy 100 $ :20am 1:22pm 1:22pm Sell 2000 $21.30 Buy 1000 $ :12pm 1:35pm Buy 800 $ :35pm Buy 600 $ :40pm 1:45pm 1:45pm Buy 300 $ :25pm 1:56pm 1:56pm Buy 450 $ :54pm 2:10pm 2:10pm This trade with Trader Dealer would cost $66. 2:38pm 2:45pm 2:38pm 2:45pm Sell 200 $21.70 Sell 300 $22.10 Scalping the market 3:10pm 3:30pm 3:10pm 3:30pm Sell 500 $ :56pm 3:56pm Sell 700 $20.50 important element to look at when selecting stocks for short term trading is their average trade movement on either side of the market in a short space of time. By completing a simple scan in Market Analyser we can generate a list of stocks that the have an average true range of more than $1. That means the stock generally moves more than $1 each Page 13. Trade Type Trade History $20.00 $20.10 $20.07 $20.28 $19.90 $21.00 $20.09 $20.80 $21.00 $21.50 Trade Type Trade History $21.10 $21.30 $21.70 $22.10 $21.92 $20.50 Page 14.

9 8. Trade Execution Details of the trade 10 Buy orders were placed to market and executed for a total trade value of $96,389. All brokerage charged on the trade was $66. 6 Sell orders were placed to market and executed for a total trade value of $99,980. All The Market Analyser is a comprehensive charting and market analysis package that allows you to trade straight into the ASX order book using Equities, Options or CFDs. Some features of the product include: charged on the trade was $66. Total Brokerage is $132. The same trades taken with another CFD provider at the standard rate of 0.10% ($10 min) would cost $ Advanced charting and market scanning functionality 7. Risk Management the market. Two things can happen with the open position: you can make money or you can lose money. You need a plan to deal with both scenarios. If the market goes against you, you need to have a predetermined point where you will exit the trade with a loss. This is commonly known as the stop loss. A stop loss is a protective order placed at the same time as the position is opened that will automatically close your position should it trade at a certain level against your initial view. For a long position the stop loss is placed below the market. For a short position the stop loss is placed above the market. It can be quite stressful watching a trade go against you, however by employing a stop loss order, you have already considered the downside and concluded that the potential reward warrants the risk. It s simple to create a protective order in the Market Analyser. Once your position is open you can create a conditional order that will automatically close the position at a predetermined level. In this case, we want to sell 2000 BHP if the stock trades at or less than $ Comprehensive watch list feature with pre-populated lists Conditional Order Pad within Market Analyser Integrated Integrated Order Order Management Integrated Management function Order Management Page 15. Page 16.

10 10. Frequently Asked Questions (FAQs) What is Direct Market Access? Direct Market Access ensures you are trading on real market prices and liquidity. When you place a trade it is replicated in the underlying exchange before being offered to you as a CFD. Market Makers on the other hand offer a market that may differ from the underlying exchange. Advanced analysis features What is Margin? Margin refers to the deposit the trader must provide in order to open a position. For instance, if BHP has a margin of 10%, the client must pay 10% of the total order value and borrow the remaining 90%. By trading on margin, the client can gain a larger exposure to a particular stock for a reduced amount of money. The Margin is set by the CFD provider. Why do margins vary? 9. Why Trader Dealer for CFDs? Trader Dealer is committed to providing active traders with superior trading resources, transparency in pricing and order execution at the market s most competitive rates. Three things that really make us stand out: Tools Market Analyser is one of the most powerful integrated market analysis and trading platforms available on the market today. You can trade equities, options, warrants and CFDs from the one platform and access data and market analysis tools for local and international markets. Service We back the speed and convenience of online trading with immediate telephone friendly support straight away. Our team is dedicated to providing you with the best service available and we re happy to answer any questions you may have in relation to trading with Trader Dealer. Price We are proud to be one of the most cost effective trading companies in the country, because we re big on helping you squeeze the most out of your hard earned dollars. fee for trades. You can trade an unlimited number of times in the one stock, on the one side and only one brokerage rate will apply at the end of the day. Under our Block Rate Trading structure, you can trade $100,000 for just $66. Liquidity and volatility of the underlying security dictate margin. What is available to trade? The majority of stocks on the ASX can be traded as a CFD. Over 150 of these can be short sold. International markets are also available on request. For a full list, visit Is the pricing similar to Trader Dealer s existing setup? Yes, traders can place multiple orders in the one stock, on the one side, in the one day and all orders will be treated as one trade. The number of orders is unlimited. Can I use my existing Trader Dealer account to trade CFDs? No to trade CFDs you will need to open a separate CFD trading account. This can be done online. Once the CFD account is open, you will have the ability to select your equities, options or CFD account to execute trades all through the one platform. This provides ease and simplicity while saving data fees from multiple platforms. Page 17. Page 18.

11 Are funds held in the one Cash Management Trust? No. Funds connected with a Trader Dealer Equities/Options account are held by Adelaide Bank or Macquarie Bank. Funds connected to a CFD account are held in Trust by MF Global. Both accounts pay interest. For more information on Trading CFDs, call our trading desk on or visit to open an account. Disclaimer Trader Dealer Online AFSL For long positions, the overnight target cash rate +2.25% is applied to the full face value of your position. For short positions, we pay you interest calculated as the overnight target cash rate -2.25%. What else can I trade? This information is prepared for the general information of traders and investors. The information does not, the merits of any recommendation vestments are appropriate for every individual. You can also trade Foreign Exchange through Trader Dealer. This can be traded through WebIress and is available on all major currency pairs and a large number of exotics. Do you pay interest on available Funds? We pay interest on the free equity in your account. This is the overnight target cash rate -1%. Where can I learn more? Visit CFD Space within the Trader Dealer Blog. This can be found at blog.traderdealer.com.au Page 19. Page 20

12