CommSec CFDs: Introduction to Indices
We re here to help To find out more, call us on 1300 307 853, from 8am Monday to 6am Saturday, email us at cfds@commsec.com.au or visit our website at commsec.com.au. Important Information This brochure has been prepared without taking account of the objectives, financial and taxation situation or needs of any particular individual. Because of that, before acting on the information in this brochure, you should consider its appropriateness to your circumstances, having regard to your objectives, financial and taxation situation and needs. OTC CFDs are not suitable for all clients. OTC CFDs involve leverage and it is possible to lose more than your initial investment. You need to consider your own circumstances and should seek independent advice if CFDs are approriate for you. You must read and consider the CommSec CFDs before taking up this product. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and a Participant of the ASX Group and Chi-X (Australia). Examples used in this brochure are for illustrative purposes only.
Contents Share market indices: an introduction 2 What are Index CFDs? 2 Futures 2 Why trade Index CFDs? 3 Benefits of trading Index CFDs with CommSec 4 Factors to consider when trading Index CFDs 5 Example 5 Buying the Australia 200 Cash 5 Opening the position 5 Closing the position: profit on trade 6
2 CommSec CFDs: Introduction to Indices Share market indices: an introduction A share market index provides a measure (statistical indicator) of the overall performance of the share market, and is calculated from the prices of a group of stocks within that market. In Australia, for instance, our most important share market index is the S&P/ASX 200. Inclusion in the S&P/ASX 200 depends on a company s market capitalisation and liquidity. A share market index allows a whole market to be compared and measured against other assets, such as overseas share markets. So, for example, on the evening news you will usually hear reference to the latest figures and movements for indices such as the Dow Jones, the S&P 500 (US), the Nikkei 225 (Japan) and the FTSE 100 (UK). A number of factors will influence the value of the various indices and cause them to move up or down, including general economic data, company reporting and political changes. What are Index CFDs? Index CFDs are simply contracts for difference (CFDs) based on share market indices rather than individual equities. As such, they offer investors the opportunity to trade the share market as a whole, rather than trading individual stocks. Stock indices are in fact one of the most popular forms of CFD trading 1 and with access to a wide range of indices globally, it s not hard to see why. Trading individual shares internationally may be a challenging exercise for many investors, but trading share indices means you can potentially benefit from movements (in either direction) of the whole market, without having to research and invest in individual stocks. Futures As well as taking a CFD position on the current market, you can trade CFDs on index futures. This allows you to invest in futures with a smaller transaction than would normally be possible in the direct futures market. And it s possible to trade CFDs on stock index futures even when the underlying markets are closed. 1 Investment Trends 2013
CommSec CFDs: Introduction to Indices 3 Why trade Index CFDs? CFDs have become a popular investment product in recent years for many reasons; some of these are to do with changing attitudes to investing, while some relate to the specific benefits of CFDs as an investment product. Index CFDs offer all the advantages of equity CFDs, with some additional benefits. Short or long-term strategies Diversification Profit from falling markets Hedging Tight spreads 24-hour trading With index CFDs, you can employ either short-term or longer-term strategies, choosing between current market movement or futures. CFD trading on indices offers you broad market exposure instead of access to only a few individual stocks. This helps to mitigate risk as your investment is not dependent on the movements of just one company. Just as you can sell short to profit from falling prices of individual equities, you can benefit from a potential decline in the value of the market by selling index CFDs and then buying back when the predicted fall does occur. You can also use index CFDs to protect your existing share portfolio. So, for example, you could sell CFDs representing the value (or part of the value) of your portfolio and then if the market declined profits from those sold CFDs could offset the losses on your portfolio. CommSec offers narrow spreads, including a 1-point spread on our Australia 200 cash index during market hours. Share trading is limited to stock exchange hours, but the index market is open for trading 24 hours a day during the week (with CommSec support staff available Monday to Saturday).
4 CommSec CFDs: Introduction to Indices Benefits of trading Index CFDs with CommSec Trading Index CFDs with CommSec offers you a range of advantages, including: Fast execution Advanced trading platform Range of order types Real-time funds transfer Whether you are dealing over the telephone or via the internet, transactions are executed quickly, with internet deals typically transacted in just fractions of a second. Launch our web-based trading platform direct from the CommSec website, with no requirement to download software. The CommSec CFD Trading Platform offers ease of use along with professional tools such as real-time charting and pattern recognition software. The customisable layout means that every trader can design a layout to match their needs. CommSec offers a range of order types that help you manage the risks of leverage trading. Stop losses can be added to your order to close your position if the market moves against you. Guaranteed stops ensure that your position is closed at exactly the price you specify, even if the market gaps. Trailing stops move with your profit, so you don t have to keep checking your trade and adjusting the stop loss when things are going well. Using our real-time funds transfer you can fund your CommSec CFD account instantly using your linked bank account. This means you can meet margin requirements or top up your account to place a trade without waiting for funds to clear overnight. Log onto the CommSec website at commsec.com.au to take advantage of this feature. 24 hour customer service Our CommSec CFD dealing desk is available 24 hours a day from 8am Monday to 6am Saturday to assist with any questions. Whenever the market is trading we have a dealer available to take your calls. Contact us on 1300 307 853 or via email at cfds@commsec.com.au.
CommSec CFDs: Introduction to Indices 5 Factors to consider when trading Index CFDs Exchange rate risk When you take an Index CFD position the contract currency of the CFD is usually the local currency of the index. When you enter into CFDs for which the contract currency is not Australian dollars, all cash flows are calculated and payable in the contract currency. You will therefore be subject to foreign exchange rate fluctuations during the term of the CFD. Dealing in foreign currency-related transactions can expose you to foreign exchange risks between the time the transaction is entered into and the time the relevant conversion of currencies occurs. Leverage Index CFDs can have small initial margin requirements beginning at 1%. As with all CFDs Traders need to be aware that the use of leverage can lead to large losses as well as large gains. It is vital that you monitor your open positions closely at all times. You can also take advantage of our range of risk management tools to manage your portfolio, please visit our website at commsec.com.au for further details. Example Buying the Australia 200 Cash Opening the position It is January 2013 and the Australia 200 Cash is currently quoted at 4707/4708. There have been some positive economic data released and you think that the market is likely to pick up. You buy two contracts at 4708. (One standard contract is the equivalent of $25 per index point.) There is no commission payable. To open your position you supply an initial margin of 1%. For every point that the sell price rises above or falls below 4708, you will make or lose $50. Initial margin per contract (4708 x 25) x 1% = $1,177 Total initial margin $1,177 x 2 = $2,354
6 CommSec CFDs: Introduction to Indices Closing the position: profit on trade One week later, the Australia 200 Cash has climbed to 4756/4757 so you decide to take your profit. You close your position by selling two contracts at 4756. Your profit on the trade is calculated as follows: Profit Opening level 4708 Closing level 4756 Difference 48 Gross profit: 48 points x 2 contracts x $25 per point = $2,400 To calculate the net result you also have to include interest adjustments. Selling the FTSE 100 Opening the position It is November 2012 and the FTSE 100 Cash is currently quoted at 5867/5868. You believe that uncertainty may push the index down so you sell three contracts at 5867. (One standard contract is the equivalent of 10 per index point.) There is no commission payable. To open your position you supply an initial margin of 1%. For every point that the sell price rises above or falls below 5867, you will make or lose 10. Initial margin per contract (5867 x 10) x 1% = 586.70 Total initial margin 586.70 x 3 = 1,760.00 Closing the position: profit on trade Later that month, the FTSE 100 Cash has fallen to 5791/5792 so you decide to take your profit. You close your position by selling three contracts at 5791. Your profit on the trade is calculated as follows: Profit Opening level 5867 Closing level 5791 Difference 76 Gross profit: 76 points x 3 contracts x 10 per point = 2,280 To calculate the net result you also have to include interest adjustments and the effects of any change in the exchange rate between when the position was opened and closed.
CommSec CFDs: Introduction to Indices 7 1300 307 853 commsec.com.au MKTG957 10/13