DON'T BE SCARED OF CFDS
I find more and more people are asking me about CFD's.
"I keep hearing about them," they say. "But they seem a bit scary and I don't understand them?"
So here goes. Let me try and clear it up.
CFD's stand for Contracts For Differences. Don't worry about the name.
Just remember in effect you are buying and selling shares but instead of doing this with the stock market in effect you are doing it with the equivalent of a bookmaker!
The contract is between you and the CFD firm. The "differences" bit just means the difference between the price you bought at and the price you sell at.
So what's the advantage of a CFD?
Well, short term it's cheaper. There isn't any stamp duty to pay and you don't pay any extra spread. But you will have to pay a little every night to keep it open, we're talking small pence here.
You also get leverage. For example if you put a grand in, you could deal in 5-10 grands worth of market exposure. So you only have to put up a small percentage in cash for each deal value.
Other advantages? You can go "short" very easily, bet on shares to go down as well as up – as well as on things like the FTSE and Dow and commodity prices.
Probably the main advantage for me is what is called "Direct Market Access".
This means you can enter an order directly onto the order book and actually see your order as can others with ADVFN’s Level 2 service.
Say a share has a biggish spread. Let's say it's 750 to sell and 780 to buy. Wouldn't it be great to be able to buy nearer the sell price than the buy price?
You can try. You could put an order in for shares at 751 for example. This bypasses market makers. In effect you are putting your order on a notice board saying anyone want to sell your shares to me at 751 instead of 750?
If they do someone else with direct access can sell their shares to you. You get the shares at a great price (751) and they get a better selling price. Both parties are happy.
You may not have anyone wanting to sell to you so you may not get them. It costs nothing if you don't get any shares at the price you want.
However over the years I've often got shares at the sell price and this has saved me a fortune, often as much as 5% on the spread sometimes.
Two favourite shares I have done this with over the years are RWS and Dialight.
It is also handy if you want to bet on shares to go down instead of using a spreadbet.
Let's say you thought a certain company was overvalued and the price is 680-690 - a spreadbet firm would get you a short but they would charge you spread so you would be short at nearer 677 probably.
But with DMA you could put in an order at 689. If you got that you are short from a massive 12 points higher! Worth a go.
And of course in effect you can go short of shares you don't actually own.
If you are new to DMA you have to be careful and learn how to do it.
The account I use is http://www.ig.com/nakedtradercfds
Once signed up they have an excellent email education programme to gradually teach you how to use DMA CFD's.
Really worth a look at and it is not something to be scared of.
Remember overall you do not personally own any shares at all. Your position is with the firm you are dealing with. It is up to them to buy or sell the shares.
However you do see your orders in the market which is also quite fun.
And the final advantage of CFD DMA is that your order could be filled during the auction after market hours, you could get a great price while the market is shut!
So don't be scared of Cfds, it is a handy extra way of getting extra exposure to the market and perhaps getting better prices.
One thing to be wary of: Don't use all the leverage if you can't afford it, because after all then you are in effect borrowing money you don't have.