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CFD Trading Strategies
CFDs are tools for trading almost any financial product on a leveraged basis.
CFD products are offered on commodity futures (metals, agricultural, and energy products) along with indices listed on various international financial markets. One big advantage they offer is that you do not have to put up 100% of the nominal value of the product.
Regardless of your investment style, CFD products are valuable tools both to grow and protect your overall portfolio. CFDs do this through speculation on short-term movements in the price of a financial product, or by allowing clients to hedge overall portfolio positions to minimize negative market movements.
Speculation on short-term share values using CFDs is generally much more cost effective than buying the physical shares, due to zero commission and zero stamp duty on the trade. Also clients benefit from the use of additional leverage which depending upon the direction of the market, may significantly raise profitability and return on equity.
Example
Mr Smith has read some articles about mergers in the banking industry and feels that Bank X is a possible target. He buys 10,000 shares of Bank X at $22.50. Ten days later a takeover bid for Bank X is announced and Mr Smith sees a 15% premium (profit) on his shares.
Initial investment
10,000 x $22.50 = $225,000 / 10 = $22,500
Shares x Price = Total value / Margin requirement
10,000 x $22.50 = $225,000 / 10 = $22,500
Shares x Price = Total value / Margin requirement
Commission charge
$0.00
$0.00
Interest charge
$225,000 x 8% / 360 x 10 = $500
Loan x (LIBOR + 3%) / 360 Days x Days held
$225,000 x 8% / 360 x 10 = $500
Loan x (LIBOR + 3%) / 360 Days x Days held
Net Profit
33,750 - $500 = $33,250
Profit - Interest
33,750 - $500 = $33,250
Profit - Interest
Profit from Sale
225,000 x .15 = $33,750
Original value x Premium = Profit from sale
225,000 x .15 = $33,750
Original value x Premium = Profit from sale
Hedge positions can be a good long-term buy in a portfolio against short-term declines in value. Investors may not want to liquidate positions that overall provide growth, dividends and/or share appreciation. This is understandable given commission charges and taxation involved with owning shares.
However, if the market is set to decline, it is not a good decision to hedge long-term positions.
