Plenty of choice but read fine print first

Hid­den costs can make com­par­isons be­tween CFD providers tricky, re­ports Toni Case

The Weekend Australian - Review - - Wealth - Toni Case is the man­ag­ing ed­i­tor of Com­pareShares. com. au

THE CFD in­dus­try is so hotly con­tested that CFD providers have never been more gen­er­ous in their at­tempts to lure re­cruits into the scene. Books and CDs, fre­quent traders’ dis­counts and boot- camp style train­ing cour­ses are the types of free­bies that CFD providers are show­er­ing new clients, en­cour­ag­ing them to put their lu­cra­tive trades through them. In­deed, it’s a good time to be shop­ping for a CFD provider.

CFD providers come in all shapes and sizes, mak­ing com­par­i­son a lit­tle tricky. The im­por­tant point is to find a CFD provider that suits your needs, which in­cludes such things as the types of se­cu­ri­ties that you’d like to trade, an ap­pro­pri­ate trad­ing plat­form — will you be trad­ing from home or else­where? — plus teaming up with a provider that matches your level of ex­pe­ri­ence. Do you need to be put on a CFD boot camp, or are you al­ready well- versed in the art of trad­ing?

It’s im­por­tant to line up CFD providers side by side and com­pare them across the most im­por­tant fea­tures such as bro­ker­age, in­ter­est costs, plat­form fees and risks man­age­ment tools. The ta­ble on this page is a good start­ing point.

Since the UK is the birth­place of CFDs, a sig­nif­i­cant num­ber of CFD providers are the off­spring of large in­ter­na­tional par­ents such as UK- based play­ers MF Global, IG Mar­kets, City In­dex and CMC Mar­kets, and GFT from the US. Oth­ers are lo­cal de­riv­a­tives play­ers such as Son­ray Cap­i­tal Mar­kets, CFD Trad­ing, Bro­kerOne, Mar­ketech, FP Mar­kets and GET Fu­tures, or house­hold names in the Aus­tralian stock­broking scene such as Com­mSec and E* TRADE.

The costs of trad­ing CFDs in­clude the com­mis­sion to buy and sell a CFD, daily fi­nanc­ing charges, monthly fees for us­ing the CFD provider’s trad­ing plat­form ( some of­fer it free, oth­ers charge a monthly cost of up to $ 55) and lastly a monthly charge to ac­cess live ASX mar­ket data. One way to avoid this lat­ter charge is by us­ing 15 min­utes de­layed data, which is free.

Com­mis­sion charges on CFDs range from zero to 0.2 per cent of the to­tal po­si­tion wa­gered. This is the dif­fer­ence be­tween pay­ing noth­ing ev­ery time you buy and sell a CFD to $ 20 a trade, based on a $ 10,000 trade.

Be­fore you get too ex­cited and start scan­ning down the list for the cheap­est com­mis­sion, it’s good to re­mem­ber it’s not quite so straight­for­ward. Cheap com­mis­sion means lit­tle if you’re pay­ing through your teeth for daily fi­nanc­ing charges. Since CFDs are a lever­aged prod­uct — in other words, you’re es­sen­tially bor­row­ing funds from the CFD provider to place your trade — you have to pay daily fi­nanc­ing charges to the CFD provider for the priv­i­lege of us­ing th­ese bor­rowed funds. Daily fi­nanc­ing charges range from 2 per cent to 3 per cent above the overnight cash rate ( roughly 6.75 per cent).

The in­ter­est rate cal­cu­la­tion is fairly sim­ple: you di­vide the in­ter­est rate by 360 ( not 365) to ar­rive at the daily fi­nanc­ing cost. Based on $ 10,000 at 8.75 per cent, this means that you’ll be up for $ 2.43 each day in in­ter­est. The dif­fer­ence of 1 per cent be­tween providers mightn’t seem that much, but it can add up if you make mul­ti­ple lever­aged bets or hold po­si­tions over a long pe­riod of time. For ex­am­ple, a $ 100,000 ex­po­sure held for two weeks would cost you $ 340 at 8.75 per cent com­pared to $ 379 at 9.75 per cent.

But if you short- sell a CFD — in other words, sell a CFD and then re- buy back later in the hope that the CFD has fallen in price — the CFD firm will pay you in­ter­est in­stead. Re­fer­ring to the ta­ble you can see that most CFD firms will pay you the of­fi­cial cash rate less 2 per cent, or at worst 3 per cent.

The aim, there­fore, is to find a CFD provider that charges the low­est in­ter­est on the long ( buy) side of a trade, and pays the high­est in­ter­est rate on the short side.

Un­for­tu­nately the tricky bit is yet to come. There are some CFD providers in the mar­ket ( not all) who in­clude a spread on a CFD trade. If you don’t know what a spread is, don’t fret — it can be sim­ply ex­plained.

Rather than of­fer­ing a CFD priced at $ 1.00, some CFD providers will of­fer this same CFD at $ 1.01 and will keep one per cent for them­selves. So if the head­line bro­ker­age charged for trad­ing CFDs is 0.1 per cent, and they also charge you an ad­di­tional one per cent via the spread, you would ac­tu­ally pay 1.1 per cent in com­mis­sion on a given trade.

Just to clar­ify the con­cept of a spread, let’s say that you’re trad­ing Oil Search ( OSH) shares and the of­fer on your share trad­ing plat­form is $ 4.37. If you in­stead wanted to trade CFDs over Oil Search — rather than shares — some CFD providers will of­fer a price of say $ 4.38 or $ 4.39. The spread’’ is the dif­fer­ence be­tween the real of­fer in the un­der­ly­ing mar­ket and the of­fer pro­vided by the CFD firm.

So how do you know what you are re­ally pay­ing in com­mis­sion? Firstly, you need to find out how much bro­ker­age the CFD firm charges, if it charges com­mis­sion via a spread, or if it has the po­ten­tial to charge both. And then find out whether the spread is fixed, or whether it can change. A fixed spread is cer­tainly prefer­able to a spread that can be altered at the CFD bro­ker’s dis­cre­tion.

If you don’t re­ceive a straight an­swer from the firm, read their Prod­uct Dis­clo­sure State­ment. Clearly you are at risk of be­ing charged more than you bar­gained for with a firm that has the right to al­ter the spread.

Be­fore you can start trad­ing CFDs you’ll have to ac­cess a CFD trad­ing plat­form. Some CFD trad­ing plat­forms are browser- based, which means that they are ac­cessed via the in­ter­net ( the ma­jor­ity aren’t Mac- friendly), while soft­ware- based plat­forms in­volve in­stalling soft­ware onto your hard drive. The ad­van­tage of web- based trad­ing plat­forms is mo­bil­ity ( as long as you have in­ter­net con­nec­tion you can ac­cess it, ei­ther in the of­fice or trav­el­ling over­seas), but there’s a down­side if broad­band speeds are slow. Al­though soft­ware- based plat­forms can be re­stric­tive, they are par­tic­u­larly handy if you live in ar­eas where in­ter­net is faulty or un­re­li­able.

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