Articles of Interest

There is a common misconception in the CFD industry that commission rates on DMA CFDs are higher than on their Market Made cousins, in this article we will dispel this myth and help you understand the differences between Direct Market Access (DMA) and Market Made CFDs and why this is a common misconception amongst traders and investors.

If you are a CFD trader you will probably already know that there are two types of CFDs, DMA and Market Made, the primary difference being that when trading with a DMA CFD provider your orders flow directly into the underlying market whereas with the Market Made variety your orders are accepted at the discretion of the CFD provider and may not always flow onto the market. Most Market Makers essentially run a book aggregating all of their client’s positions and hedging any resultant outstanding amounts.

The common misconception of pricing has come about due to the fact that DMA CFD providers incurring a cost to hedge their trades. Many people believe that because of this additional hedging cost DMA CFDs are more expensive to trade, however this is not the case. With the advent of electronic order routing DMA execution costs have decreased significantly. DMA cost reductions have been primarily due to brokers competing for market share and the rebates provided by the exchanges for high turnover market participants. With DMA Costs down to 1bps or less it is not surprising that many CFD market makers are now also offering DMA CFDs and hedging risk on their market made book more frequently.

The ultimate beneficiaries of lower hedging costs are the end clients of the CFD provider. As hedging cost decrease your DMA CFD provider is able to pass on these cost reductions to their clients, meaning that today retail traders are able to day trade and scalp DMA CFDs relatively cheaply.

With no real difference in commission between trading DMA CFDs or trading CFDs with a Market Marker it is not surprising that DMA CFDs are gaining in popularity amongst retail traders and professional investors alike. Some DMA CFD providers are even offering commission rates that are lower than those offered by their market made cousins, pioneering a path for the new wave of CFD trader. 

Of course you should always bear in mind that there are advantages and disadvantages of both CFD varieties, it is important determine which variety is more appropriate and suitable for your style of trading. 

You can find out more about trading DMA CFDs in our free CFD Guide.

Corporate actions are a frequent occurrence in the Australian Market. Typically your CFD position will mirror the corporate actions associated with owning the underlying share.  Holders of a CFD position can participate in Corporate actions, including share splits and rights issues however in certain circumstances where a corporate action involves a number of options your CFD provider may not allow you to choose but will rather select an option which will be applied to all of their clients open CFD positions.

A stock split is corporate action that involves dividing the number of existing shares on issue into smaller parcels. Stock splits result in an increase in the number of shares on issue by a specific multiple however the total dollar value of the shares remains the same as the value prior to the share split, this is because no value has been added as a result of the split. The main reason why stock splits occur is because a company's share price has increased to a level making them too expensive for investors to afford. 

When the underlying share over which your CFD is based undergoes a stock split the price will usually fall in proportion to reflect the an increase in the number of shares on issue. Your CFD provider will also adjust the number of CFDs you own meaning that you will be in the same financial position as owners of the underlying stock.

A rights issue is an offer to existing shareholders in a company to purchase additional new shares. Rights Issues involves issuing shareholders new securities called "rights", which give them the right to purchase new shares at a discount to the market price at a date in the future. Essentially the company is offering shareholders an opportunity to increase their shareholding at a discounted price.

Until the date at which the new shares can be purchased, shareholders can trade the rights, in much the same way as the shares themselves. The rights issued have a value which is determined by the market to compensate existing shareholders for the dilution of the value of their shares.

When the underlying share over which your CFD is based undergoes a rights issue, owners of the CFD position also receive rights that are tradeable in the same way as the rights issued to shareholders. There may be certain circumstances where your CFD provider will simply credit your account with the cash value of the rights on their last of trading or simply allow you to purchase additional CFDs at the price attributable to owners of the rights.

Before you start trading CFDs it is important that you understand how corporate actions can affect your CFD positions.

You can learn more about CFD trading in our free CFD Guide.

A common question people ask is ‘do I receive dividends when buying CFDs?’ The answer to this question is simple, ‘yes’. However, there are a few things to be aware of as CFDs are a derivative contract between the CFD provider and the buyer or seller of the CFD, you do not own the underlying share over which the CFD is based, this means that the treatment of dividends may be a little different to what you may have become accustomed to when trading shares.

Unlike ordinary shares the dividends received by the holder of a long CFD position do not have any franking credits attached to them. A franking credit is a tax credit provided by the company with the dividend when it is paid to shareholders.  Essentially the company over which the CFD is based has paid a portion of tax on behalf of its shareholders. Fully franked dividends have a 30% tax credit attached. The concept of franking credits is peculiar to Australian companies. 

When buying shares it is important to understand that in order to be entitled to the dividend franking credits it is necessary to own the shares for 47 days which includes the dividend date. The formal requirement is 45 days but this doesn’t include the days the shares are bought or sold which increases the holding period by an extra two days. Despite franking credits not being attached to CFDs most CFD traders are not concerned as most are not long term investors and do not hold their CFD positions open long enough to gain any real benefit.

CFD traders can sell a CFD just as easily as they can buy a CFD, selling a CFD without holding a long open position is known as short selling. It is important to note that there is an obligation to pay a dividend to the CFD provider when a short sold CFD position is held over the ex-date. The ex-date is the date on which the seller, and not the buyer, of a stock is entitled to the dividend. 

It is important to be aware that when paying the dividend on a short sold position you may also be liable to pay the franked component of the dividend. The reason you may be liable to pay the franked component in addition to the declared dividend amount is because when your CFD provider hedges your short position in the market they were required to borrow stock from an owner of the shares, it is possible that they borrowed the stock to cover your short position from another Australian resident who is also entitled to the franking credit. In most cases your CFD provider will attempt to secure stock from offshore where the owners of the stock have no use for franking credits. You should always check with your CFD provider prior to short selling a CFD over dividend periods as you may find that you are also liable to pay the franked component of the dividend.

There are a number of trading strategies CFD traders can employ over dividend periods, one of these strategies is known as dividend stripping. Dividend stripping is the purchase of shares prior to a dividend being paid, and the sale of those shares after that payment. Understanding how you can trade CFDs around dividend periods is important when developing your CFD trading strategies. 

To find out more about CFD trading you can download our free CFD Guide.

The webIRESS plus trading platform is the newest product to be released by Australian financial markets software giant, IRESS market technology. WebIRESS plus allows retail online traders the ability to take full advantage of the flexibility and speed offered by IOS plus from the comfort of their home or office.

Unlike the traditional IOS classic powering conventional webIRESS, IOS plus provides users with the flexibility of being able to utilize advanced web services technology in their automated trading strategies. webIRESS plus users are now able to build trading algorithms without having to install and run the IRESS desktop application saving time and money. Being server based the web services technology also provides significant redundancy advantages.

IOS plus has significant speed advantages over predecessor with order transmission speeds being improved by a whopping 150%, this means webIRESS plus users will be able to transmit orders to the market at speeds not previously available to retail clients in Australia. Faster execution translates into more trading opportunities. 

The old webIRESS has also had a makeover with webIRESS plus utilising the lasted in Java technology giving the front end interface a smooth visual appearance reminiscent of windows 7. Combined with an improved visual appearance webIRESS plus offers users advanced order types including being able to create multi legged contingent orders. 

Currently webIRESS plus is only being used for CFD trading, this is primarily because of the low latency order transmission times demanded by CFD traders. It is expected that webIRESS will shortly be adapted for online share and options trading also.

At present webIRESS plus is only being offered by CFD provider International Capital Markets (IC Markets), this is primarily due to customer demand for low latency CFD trading and the company’s drive to stay at the forefront of trading technology. It is expected that other CFD providers currently offering webIRESS will soon recognise the significant benefits of webIRESS plus add this revolutionary trading platform to their arsenal.

When choosing a CFD provider you should consider the platform being offered whether it will give you an edge in your trading. If you are a day trader or scalper you should definitely consider the webIRESS plus as it will give you a significant speed advantage over all other platforms in the market allowing you to take advantage of fast moving markets and rapid match price changes in the opening and closing market phases. IRESS has once again set a new benchmark for high speed low latency trading in Australia.

To find out more about CFD trading on the webIRESS plus platform you can download our free CFD Guide.

Before you start trading Contracts for difference it is important to obtain a few tips from the professionals to make sure that you do not make many of the costly mistakes that newbie traders make. Below are three trading pointers which will help you in your CFD trading success.

1. Manage your Positions
Repeatedly new traders spend a significant amount of time selecting, planning and executing new positions, however they regularly make the mistake of exiting these trades with much less thought. This is unfortunate as it is the exit which will determine whether a trade has been profitable or not.

It is human nature to take profits hastily while the concern of incurring a loss will see the same trader leaving poorly performing positions open in the hope that prices will move in the correct direction and reduce losses or even turn them into profitable trades.

Numerous new traders forget about the old saying “Let your profits run and cut your losses short”. As the proverb states if you have a profitable position, it is best to allow that trade to realize its full potential, as opposed to closing it out at the very first sign of a small return. On the other hand, if you happen to hold a position that is moving against you, it is best to move quickly to exit that position, before the loss becomes too great.

If you're managing your trades properly, your average winning trade should be significantly larger than your average losing trade. Once you have the discipline to buy and sell in this way, you should be able to achieve overall profitability even when only half of your trades are winners. A lot of traders make the mistake of not closing poorly performing positions fast enough. One tool that makes this less complicated is a stop-loss order.

After you have determined a price level that corresponds with the amount of risk that you are prepared to take on a particular trade, a stop-loss order can be placed at this level to automatically close out the trade. This removes the human aspect from the exit, reducing the risk that the emotion of hope will interfere with rational decision making.

It is important to understand that a stop-loss order simply provides a trigger point for the execution of an order. If a sell stop has been placed on a long position, the stop-loss will be activated if the price trades at or beneath the nominated stop level. Occasionally, this may lead to trades being executed a price that is less favorable than the nominated stop-loss price. This is known as slippage.

2. Understand the instrument that you're trading
Being over-the-counter products, there are various differences in the contract specifications of CFDs. If you are thinking of trading these products, it is critical to know what these specifications are.

You must also be aware of the influence that foreign exchange fluctuations might have on your holdings. If the base currency of the CFD rises against the base currency of your account your profits could be eroded by any currency fluctuation or your losses might be made worse.

Most CFD traders trade CFDs based on stocks listed in their home country. The simple reason for this is that traders are more comfortable trading CFDs that they're familiar with. Most traders also benefit from the convenience of trading their home market as it isn't practical to sit up for half the night to trade a Contract for difference over a share listed on an exchange in another part of the world?

In lots of cases it is much better to stick with CFDs based on equities listed on exchanges that you're familiar with as opposed to trading Contracts for difference based on stocks listed on markets you don't fully understand.

3. Use the correct order types
You should treat trading as a serious business. As such, you must take some time to make sure that you thoroughly understand the tools of your business. Many CFD traders miss chances or have been stopped up out of trades at the wrong time just because they placed the wrong kind of order.
                   
At the very least, be certain to become familiar with the following order types:

Market order: This kind of order is utilized to execute a trade at the present market price.

Stop-order: This order type is utilized to exit a trade at a specific price. Stop-orders are placed at a level that's worse than prices presently available in the market. On a long position, the stop-loss order to sell would be located below the present market price. Conversely, on a short position, the stop-loss order to buy would be placed at a level greater than present market prices.

Limit order: A limit order is used to exit a trade. Limit orders are placed at a level that is better than the present market price. When seeking to lock-in profits on an open long position, a limit order to sell would be placed at a level greater than current market prices. If seeking to lock-in profits on a short position, a limit order to buy would be placed at a level underneath current market prices.

You must always understand that as Contracts for difference are leveraged and that buying and selling them can be risky. However if used correctly Contracts for difference will become a valuable tool within your trading arsenal.

To find out more about CFDs you can download our complimentary CFD Guide.

Many amateur CFD traders start trading the hard way without learning from experienced traders who have made all the expensive errors traders make on their path to success. To help you understand the most common errors made by traders and to prevent you from making the same errors with your own money we've outlined a few common mistakes below.

1. Trading for the incorrect reasons
Most people will commence trading with the intention of making a return from day one. However, there are a few people who trade for entertainment. If you are serious about making a profit, it's important that you treat your trading like a business. Those who invest for entertainment will be lucky if they make money, in reality more often than not they will lose.

2. Over-Trading
You should avoid the temptation to over-trade. Over trading is really a risk for those traders that are not following a technique, choosing to sit down on the sidelines until a clear trend emerges is in itself a legitimate strategy. You should avoid the mistake of fully leveraging your positions simply because you've got free equity available. It is also important to make sure that you don't invest with money that you cannot afford to lose.

3. Psychological and Emotional Mistakes
Developing the mind-set that you need to get each trade right is often a dangerous mistake to make if you cannot accept the very fact that you're going to make errors. You may find it hard to close out of a losing position, instead your mind will find ways to persuade itself that the trade will swing around and happen to become profitable. There is a danger that subconsciously you will become blind to evidence that suggests you are wrong.

You have to recognize that you will not get each trade correct and that you don’t need to get each trade correct, this will enable you to deal with your trades effectively. Being in the wrong is something that we frequently feel bad about. We're taught through positive reinforcement that we should feel better about being correct. This repeatedly presents problems when trading.

Losing trades may cause emotional distress and prevent you from correctly analysing the market. This can present a risk that you'll start over-trading in order to make back losses or to “get even” with the market. On the flip-side, winning trades can produce feelings of excitement and invincibility. If you make the error of permitting this emotion to take hold, you may find yourself taking unnecessary risk or making stupid errors through carelessness.

You should aim to keep your trading related emotions under control. Wise traders will focus on the downside risk potential of each trade and will make sure that this is within their pre-defined parameters outlined in their trading strategy.

4. Not understanding the suitability of Contracts for difference
Trading CFDs has enhanced the trading possibilities for a great many retail traders. CFDs are an ideal product for traders with a short-term time horizon along with a desire to increase their market exposure on a small amount of capital.

It is important to remember that contracts for difference are not always suitable for long-term traders due to financing expenses which can build up over time. In addition traders who don't supervise their open positions won't find CFDs suitable. You always need to ensure that the amount of money that you allocate to your trading account is an amount that you would be able to afford to loose.

Before you start trading Contracts for difference you ought to be familiar with the negative aspects linked to the product. As with all geared financial products, the risks are going to be higher if you don’t take the time to understand the product.

For traders that understand how CFDs work and learn to minimize their risks, there can be significant benefits from CFD trading. Through the use of leverage plus the convenience of trading, retail traders now have greater opportunities than they have ever had before.

If you would like to learn more about CFD trading and how to develop a trading plan you can download and read our free CFD Guide.

Trading mistakes can be made by even the most experienced professionals. Most mistakes made by traders come about as a result of a lack of preparation, knowledge or discipline. Whilst it is important to learn from your mistakes, it is even better and much less expensive to learn from the mistakes of others.

Below are three of the most common mistakes made by CFD traders:

1. Excessive Leverage
One of the main benefits of CFD trading is the ability to gain exposure to a share, index or foreign exchange contract with a relatively small capital outlay. Rather than paying for the full notional value of the CFD position CFD traders can enter into positions with margins as low as 5% or even less. It is important to note that although a smaller capital outlay is required to open the position the CFD trader is still exposed to the price movement of the share CFD for the full notional value of the position. A CFD trader trading a CFD at 5% margin is leveraging their initial outlay by 20 times, meaning a $5,000 deposit could be used to open a $200,000 CFD position.

As only a fraction of the face-value of the trade is outlaid when trading CFDs a small price change could result in substantial gains but also substantial losses. For example when trading a CFD on a margin of 5%, a price rise of 1% in the underlying market may result in gains of 20%, however, if price fell by 1%, it may result in a loss of 20% of the amount required to open the position.

It is important to remember that leverage is a double-edged sword not only can it work for you but if not managed correctly it can also work against you, often novice trades ignore the fact that if unmanaged leverage can result in substantial losses.

2. Not understanding the impact of trade sizes on your account
Due to the leverage associated with CFD trading, relatively small outlays can result in large moves in your overall account balance.

For example buying 10,000 CFDs priced as $2.40 on a margin of 5% requires an outlay of only $1,200. With an outlay of only $1,200 you can hold a $24,000 CFD position. Should the price of this position move one cent it will have an impact of $100 on the profit or loss on the traders account.

If the price of the this position increased by 12 cents a profit of $1,200 would have been made, However, if the price of the position fell by the same amount a loss of $1,200 would have been made.

The overall impact of any price movement will depend on the traders overall account balance. For a trader with an account balance of $1,500, the aforementioned trade would have had a significant impact on the traders account profit and loss. Should a trader with an account balance of $40,000 open the same position the relative impact would be much less significant.

A loss of $1,200 on a $1,500 account would result in the 80% of the total account balance being lost. However, a loss of $1,200 on a $40,000 account would result in a loss of only 3% of the account balance.

3. Trading in too large parcels
It is important to calculate the exposure your trade size before placing the trade. It is common for novice CFD traders the simply trade the maximum size available to the based on their account balance without considering the amount of market exposure associated with the position.

There are a variety of methods traders can adopt in order to calculate position size. A simply strategy is to determine an acceptable amount of risk capital should the trade go against you and calculate an acceptable position size base on this.

Should you want to restrict losses on any given trade to $200 you would calculate your position size based on your stop-loss price. For example, if the CFD was priced at $1.40 and you stop-loss was at $1.15 your risk amount would be $0.25, to calculate your position size you would simply divide the loss you would be prepared to take by the risk amount. In this case this would be $200 / $0.25 = 800, therefore your position size should be 800 units.

The method outlined above is known as fixed fractional position sizing in which a certain percentage of the overall account balance is risked on each trade. Other methods include allocating a fixed dollar amount to each trade, buying or selling a fixed number of CFDs in each trade or varying the size trades according to the profitability of your account.

Using a position sizing strategy will help you avoid the mistake of placing all of your eggs in one basket.

To find out more about CFD trading you can download our free CFD Guide.

In the early days investors wanting to borrow money to invest had few choices, either borrow money from the bank to buy shares or call your stockbroker and apply for a margin loan.

In 2003 traders and investors in Australia were given another choice, CFDs. Since their introduction the industry has changed, CFDs being a simple form of margin lending have become the fastest growing derivative product in the country, outstripping the grow seen in the warrants market during the mid 1990’s.

No longer does a retail investor need to apply for a bank loan or deal with expensive full service brokers. CFDs have revolutionized the financial services industry, retail investors can now open a CFD account online in minutes and be up and trading before the end of the day, executing all of their orders in real-time online.

Unlike margin lending CFDs are typically traded over the internet with the trader’s portfolio being marked to market throughout the trading day, this is substantially different to the end of day portfolio revaluations used by margin lenders. Real-time portfolio margining means that traders can properly manage risk during the trading day rather than having to wait for statements to be generated at the end of the day.

Like shares bought using a margin loan CFDs offer the holder the ability to receive a dividend, however in most cases franking credits are not passed on the holder of a CFD unlike that that of a margin loan. The reason franking credits are not passed when holding a CFD is because the owner of a CFD holds an over-the-counter derivative contract and not the physical share. Not owning the physical share when holding a CFD position also means that the owner of a CFD is not entitled to voting rights in the listed company over which the CFD is based. Many CFD traders only hold their positions for a short period of time and are not interested in voting or franking credits but instead are interested in making a profit from the short term price changes of the share over which the CFD is based.

One of the most significant advantages of CFDs is that traders are able to sell them just as easily as they can buy them, what this means is that going long is just as easy as going short, allowing traders to profit in falling markets. With traditional margin lending short selling is difficult and near impossible.

CFDs are relatively cheap when compared to margin lending, typical brokers offering margin lending will charge 0.50% whereas a typical CFD provider will charge around 0.10%. One thing to be wary of is the interest rates charged by margin lenders and CFD providers. It is important to note that margin lenders will charge interest on the amount borrowed whereas CFD providers will charge interest on the full notional value of the open position, however CFD financing rates tend to be lower. Financing rates are an important cost to consider when comparing both products but this is less important for CFD traders that only hold their positions for a short period of time. 
 
Typically CFDs offer traders more leverage than conventional margin loans allowing traders to obtain a better return on their investment. You should also be aware that an increase in leverage can also result in an increase in risk, this is common with all leveraged products. The leverage offered by CFD providers can be as much as 100 times (1% margin) whereas margin lenders will generally only offer around 10 times leverage (10% margin) or less. Leverage will vary between each CFD provider and margin lender and is often determined on a stock by stock basis considering the market capitalisation of the stock and liquidity. 

As CFDs are an over-the-counter derivative product it is important to note that you do not own the underlying share or instrument over which the CFD is based, this also means that you cannot transfer your position to another CFD provider or stock broker you can only deal with the CFD provider that you opened up the position with. When you buy shares on a margin loan the shares are held in your name this means that you are able to move them freely from one stock broker to another.

CFDs suit short to medium term active traders looking to take advantage of market movements in both directions, however, margin lending is better suited to people who are looking for long-term investment opportunities and to take advantage of the tax benefits franking credits provide, in addition to voting rights. It is important to remember that both products are leveraged, as such should ensure that you adopt a proper money management plan and not utilise the leveraged offered to its full capacity.

To discover more about CFD trading and using CFDs in your trading plan you can download our free CFD Guide.

Direct Market Access CFDs or DMA CFDs are one of the most transparent types of CFDs available. DMA CFDs have the advantage of allowing participation in the underlying market of the stock over which the CFD is quoted. DMA CFDs are relatively new and have only become popular in Australia over the last few years however, continue to become popular as traders realize the transparency offered by this type of CFD. 
 
DMA CFDs have significant advantages over the more traditional over-the-counter (OTC) variety in that they allow the trader to participate in the opening and closing phases of the market. Being able to trade in these phases of the market offer significant advantages to traders as they are can receive the opening or closing price of the day. Traditional over-the-counter CFDs do not allow the trader to participate in these phases of the market thus preventing the trader from being able to receive some of the best prices of the trading day.

Despite the drawback of not being able to participate in the opening and closing phase of the market, over-the-counter CFDs do have the advantage of allowing the trader to buy or sell volumes that may not be available in the underlying market during normal trading hours.

DMA CFDs have become popular amongst day traders and scalpers. The main reason for their popularity is because DMA CFD providers allow CFD trades to flow onto the underlying market in the stock on which the CFD is based allowing active traders to take advantage of relatively small price movements. Using DMA CFDs also allows day traders to get set at the opening price at the start of the day and clear their positions during the closing price during the closing match phase.

One of the disadvantages of DMA CFDs is that generally DMA CFD providers do not offer guaranteed stop loss orders. Guaranteed stop loss orders have the benefit of allowing the trader to manage their downside risk. Slippage often occurs when using stop-loss orders, guaranteed stop-loss orders remove this risk altogether.

It is important to be aware that prior to opening a CFD account with you should be aware that when trading DMA CFDs you will required to deposit a higher initial margin amount than the over-the-counter (OTC) variety. In addition to higher margins many DMA CFD providers will not able to offer you CFDs over indices and foreign exchange contracts due to these contracts being over-the-counter in their very nature.

There are relatively few platforms available that offer DMA CFDs, one of the most common platforms in the Australian market is webIRESS. WebIRESS offers the speed and reliability day traders and scalpers need in addition to a variety of different order types such as trailing stop-loss orders. Another popular platform is ProDeal, ProDeal offers all of the advantages webIRESS offers with the additional benefit of being able to trade over-the-counter CFDs from the same platform allowing traders to trade CFDs on indices and forex from their DMA CFD account.

It is important that before making the commitment to start trading DMA CFDs that you understand the risks associated with the product. Like all leveraged products trading CFDs can offer substantial rewards however there are also risks involved that if not managed correctly can lead to losses greater than the trader’s initial deposit.

Before choosing a DMA CFD provider you should ensure to trial their demo platform and read their Product Disclosure Statement which outlines in detail the fees and charges, provides trading examples, and outlines the types of CFDs offered along with the risks and benefits of trading CFDs. You should ensure that the CFD provider you choose is able to offer you the platform and products that suit your trading strategy.

To discover more helpful information about CFDs you can download our free CFD Guide.