Articles of Interest

It’s not hard to find blogs and forums where people talk about the benefits of CFDs over shares but have you questioned whether the people actually writing these comparisons are traders who have experience in both financial instruments or are they just paid authors out to promote CFDs. In this quick review we will touch on the differences between both CFDs and shares and highlight the unique aspects of each product that has allowed traders and investors to harness the power of their investment portfolio from the comfort of their own lounge room.

CFDs and shares are very different not only in the way they work but also in how they are traded. One of the fundamental differences is the fact that CFDs are an over the counter or OTC product meaning your transactions are not conducted on an exchange but rather with the CFD provider that you are dealing with. Shares on the other hand are traded on an exchange meaning that you are buying and selling off other people in the market with your stock broker simply acting as a conduit providing you with a gateway to the market.

So now that you know one of the most important fundamental differences between CFDs and shares let’s get into some of the key mechanical differences in detail.

Settlement
One of the most apparent differences between both products is the way in which they are settled. When you buy shares on the stock exchange you don’t have to pay for the share for three days, conversely when you sell shares you do not receive any money for three days. The transaction day plus 3 days or T+3 is the settlement period set by the clearing house not the broker. Of course when trading CFDs there is no clearing house involved as the transaction is OTC this means the your CFD provider essentially sets the rules, as CFD providers typically do not want to wear the risk of having the settlement of a transaction fail they will ask for the money upfront, this concept of same day settlement is known as T+1. It’s worth noting that some online share brokers also apply T+1 settlement to minimise the risk of settlement failure.

There really is no real advantage of T+1 or T+3 settlement as ultimately the net effect is the same, however most active traders prefer same day settlement for the simple reason that it makes their cash flow easier to manage.

Leverage
Unquestionably the most important and apparent difference between CFDs and Shares is the concept of leverage. By the very nature of the instrument CFDs are leveraged meaning that for a relatively small outlay you can obtain a relatively large exposure to a share. Typically the margin rate on most CFDs is around 10% this means that with a margin of $1,000 you could potentially gain $10,000 exposure to the price movement of a share. If you were to buy $10,000 worth of shares you would have to outlay the full amount, rather than the $1,000 required to open your CFD position, providing a more efficient use of capital and return on your initial investment.

It is important to be aware that although leverage can work in your favour, it can also work against you, this means that your profits and your losses are amplified however you can also potentially loose more than your account balance. With share trading on the other hand you cannot lose more than the amount paid, however you profit potential is also reduced.

Short Selling
Equally CFDs and shares can be short sold although the process is often easier with CFDs for the simple reason that short sell transactions can be done online rather than over the telephone. The main reason why short selling shares directly is not a simple process is due to short sale reporting requirements which must be disclosed via tagging short trades executed on the exchange. Although CFD providers also have short sale disclosure requirements to meet they are not required to tag short trades for the simple reason that they often pre borrowed stock to cover any short sales, essentially this means that they have covered their clients short positions before the client even places the trade.

Costs of Trading
A common myth in the market is that CFDs are cheaper to trade than shares, however this is not always the case. Financing plays an important part in CFD trading however most traders often forget about this. Without conducting any mathematical calculations as a rule of thumb an AUD $100,000 position will cost you around $25 per night in financing, on this basis if you hold a position open for at least 5 days this is the equivalent on paying $125 in brokerage or 12.5 basis points. Of course if you don’t have the capital it may be worth paying this however if the margin of the CFD is high you should think twice as CFD financing is not calculated on the borrowed amount but rather on the full notional value of the position as such it may be more economical to pay for your position outright and pay a higher upfront brokerage cost.

CFDs can of course be a cost efficient trading tool but this is only when positions are held open for a relatively short period of time however, share positions on the other hand can be held open for as long as you like with only the initial transaction cost payable, this is an important difference to keep in mind.

Despite having to pay financing costs one of the benefits of CFDs is that you are not required to pay any GST on your commission, although a relatively small amount it is worth considering the impact of GST on your trading costs if you are an active trader.

Unrealised Profits
As CFDs are marked to market on a daily basis your profits or losses are also debited or credited from your account daily this is very different to trading shares where profits or losses are only realised at the time of sale. In this regard one of the benefits of CFDs is that you can utilise your unrealised profits without having to close your positions, naturally there is also a downside to this in that your losses are realised on a daily basis meaning that unlike share trading the free equity in your account may decline without you closing positions.  

Only five differences have been touched upon in this article, in later articles we will cover some additional differences between shares and CFDs. In the meantime if you would like to find out more interesting information about share and CFD trading you can download our free CFD guide.

CFD trading is a relatively new concept to most traders and investors in Australia, which is understandable given the mechanics of CFDs are different to traditional share trading. Having an advisor or trading mentor who is able to explain the concept of CFDs and assist you to identify trading opportunities is often a relatively safe way for new CFD traders to gain exposure to financial markets.

There are many stockbrokers and financial advisors in Australia who are able to help traders and investors looking to enter the stock market, however very few have an in-depth experience and understanding of CFDs and how they can be used not only as a hedging tool over a share portfolio but also as a great way to gain exposure to global stocks, commodities, indices and forex pairs.

Some CFD providers are able to provide you with basic CFD trading advice and education however many of them will not provide you with CFD trading recommendations. There are however some CFD providers who are able to provide you with advice and trading recommendations, it is these providers that often also specialise in other aspects of money management including financial planning, corporate advisory and funds management. Dealing with a CFD provider that does not solely specialise in CFD trading is often a good idea for novice traders looking for some assistance in managing their trading portfolio and understanding the risks and benefits CFDs.

Dealing with CFD providers who offer an extensive range of products and services aside from solely offering an online trading platform has a number of advantages in that often you will be assigned a personal account manager with whom you can liaise on a daily basis and ask questions. If you require additional services such as being contacted in the event of a trading idea you can also elect this, however you may be charged a higher commission rate when using this service. Often added benefits such as being able to participate in highly sought after placements and IPO’s will also be provided. 

In many cases getting CFD trading advice from your stock broker or CFD provider will cost more than trading for yourself online, however the added commission charges are relatively insignificant when you consider the benefits and are far cheaper than the looses that many novice traders incur when placing trades without a well thought out trading plan or strategy.

Before trading CFDs either online yourself or with a CFD provider who is able to provide you with CFD trading advice it is essential that you understand not only the benefits of CFD trading but also the risks. Often newbie CFD traders fail to understand that although the leverage associated with CFD trading can result in gains it can also result in large losses, this is why having an understanding of risk management is important.

To learn more about CFD trading it is advisable that you read this free CFD Guide.

WebIRESS is one of the most commonly used CFD and Share trading platforms in Australia, being adopted by some of the country's largest online brokers and leading CFD providers. In recent times webIRESS has undergone a makeover, with the latest version webIRESS Plus recently being launched.

WebIRESS Plus offers day traders and scalpers a number of significant advantages over it's predecessor, with the most noticeable being the speed of order execution, additional advanced order types and visual improvements. The significant improvements of webIRESS Plus make it the ideal CFD trading platform for day traders and scalpers looking to take advantage of rapid CFD price movements in the opening and closing phases of the market and during market volatility.

WebIRESS Plus is fast becoming the most popular CFD trading platform in the market due to the significant edge traders are able to gain as a result of the platforms dramatic speed improvement. In addition to the speed improvements in webIRESS Plus, there are now also a number of new order varieties including if-done orders, meaning CFD traders now have more control over their trades with the ability to set and forget orders.

Despite the significant advantages webIRESS Plus offers day traders and scalpers it is important to note that the speed advantages of webIRESS Plus are dependent on the internet connection being used. As an active trader it is always advisable to ensure that you have the fastest and most reliable internet connection possible, this may mean having an ADSL2 or cable broadband connection. Most active traders will always have two internet connections to ensure redundancy should one connection fail.

Active day traders often use the webIRESS Plus platform alongside an advanced charting package or market scanning tool. One of the more common and readily available charting packages is MetaStock another lesser known package is Spark. Spark is popular with more active day traders who monitor many CFDs at the same time and require detailed real-time information relating to price and volume changes which when combined with chart formations allow them to identify trading opportunities such as price and volume breakouts.

Of course a great trading platform, charting package and internet connection alone will not make anyone a successful trader. These are simply tools that will give you the edge over other traders in the market. The most important components of trading are information flow and discipline which when combined with a proper trading plan and tools will help you on your way to becoming a successful trader.

Currently webIRESS Plus is only available from IC Markets. You can download a webIRESS demo to see whether the platform suits your needs.

The webIRESS trading platform is one of the most common online share and CFD trading platforms in Australia. WebIRESS is used by most of the major online brokers including, Comsec, Etrade, and Bell Direct, however like all on-line trading platforms some traders might experience technical hiccups when first logging in. Some of the more common technical issues that you might encounter along with simple solutions are outlined below. 

By far the most common technical issue encountered by new webIRESS users is what is known as the “ticking clock error” this is simply and endlessly ticking clock that appears in your browser along with the words “installing software please wait”, however, unfortunately for most the wait is endless. The “ticking clock error” is a common problem with a simple solution, this error occurs because Sun Java 1.4 or better has not been installed. The problem can often be resolved through a quick Java update, or new installation from the Sun Java website. In certain circumstances a recent version of Java may already be installed yet this error still occurs, often this is due to a popup blocker or antivirus software preventing your computer from accessing “webdf.iress.com.au“ and Port 6080 or 80, this can be corrected by allowing your firewall or antivirus program to access “*.iress.com.au” and port 6080 or 80. As a precautionary measure you should always clear your browsers cookies and temporary internet files before making any changes to ensure that your old settings are deleted.

Most webIRESS problems are related to Java or the security settings on your computer, however on occasions problems may arise as a result of your internet connection or LAN firewall settings. Testing connectivity to the webIRESS server is easy and should be done if you are unable to resolve you connection problems through the installation of Java or firewall and antivirus permission changes. A simple telnet connectivity test can be run by following the instructions below:

1. Go to “Start” > Run or open a DOS command window.
2. In the Run dialog box or at the DOS prompt, type: telnet web.iress.com.au 6080
3. Press Enter.

A Telnet window opens with the message “Connecting to web.iress.com.au…”

If the connection is successful, the Telnet message will disappear leaving a flashing block or cursor in the top left corner of the Telnet window.

If a connection cannot be established you should contact your ISP or network administrator as it is likely that ports 6080 or 80 are being blocked by your firewall. 

These are some of the most common webIRESS problems, if after attempting the above solutions you are still unable to resolve your webIRESS connection problem you should contact your broker who will be able to conduct more advanced webIRESS troubleshooting.

You can download a free webIRESS Plus demo to see whether the new webIRESS Plus platform solves many of the technical issues that you may have experienced using webIRESS.

Day traders and scalpers are always looking to gain an edge in the market that will give them a real trading advantage, however most traders often go searching for faster PC's, internet connections or a better charting package, many often overlook the fundamental basics like the trading platform that they are using or the broker that they are dealing with.
 
The most important element in any DMA CFD traders arsenal is their trading platform as this is their connection to the market. May DMA CFD day traders and scalpers assume that their broker has the fastest market connectivity and trading engine behind their platform, however unfortunately in reality there are some brokers that do not have the correct infrastructure to enable sub-second order execution into global exchanges.

As a CFD day trader or scalper it is critical to ensure that your DMA CFD broker has the fastest market connectivity possible. In many cases DMA CFD providers outsource their execution services to their prime broker, although this allows the DMA CFD provider to achieve cost efficiencies it does not always help you as a day trader. In-fact outsourcing CFD execution to a global investment bank may mean that your trades are routed through one of the main regional hubs being London, New York or Hong Kong before they reach the market and appear as a filled order on your trading platform. Some global investment banks do however have localised infrastructure meaning that your orders are not sent around the world before they reach the exchange. When choosing a DMA CFD provider it is important that you ask them whether their orders are routed locally or through their prime brokers global infrastructure as this will have a significant effect on the speed of your order execution.

Aside from good market connectivity the other core element is the trading platform that you use. There are many trading platforms available to retail DMA CFD day traders and scalpers, however by far the most popular is the webIRESS platform. Many CFD providers are able to offer you the webIRESS platform however there are very few providers that are able to offer webIRESS plus. WebIRESS plus is faster than conventional webIRESS and offers split second order execution. 

As a DMA CFD day trader is important to choose a CFD provider that can give you split second order execution allowing you to acheive a CFD trading edge. Of course before you start trading you should evaluate the pro's and con's of each CFD provider and download a few trading platforms to ensure that the CFD provider you select does in fact give you an edge in the market.

To find out more about trading CFDs you should download this free CFD Guide.

The webIRESS trading platform has been available as a share trading platform since 2000, it was only in late 2003 that the platform was adapted to suit CFD trading. The early adopters of the platform led its development and consequently forged a new wave of trader, the DMA CFD trader.

Before webIRESS the only DMA CFD trading platform available was complicated and clunky, the webIRESS trading platform set the new benchmark for DMA CFD trading amongst retail investors in Australia. Recently the DMA CFD offering on the webIRESS trading platform has been extended beyond DMA CFDs on Australian shares to incorporate CFDs over shares listed in the US and on several European exchanges along with forex and indices.

The webIRESS trading platform is web-based meaning it can be accessed from any PC with on-line access and can be utilized from behind a firewall in an office or from an internet cafe. The superior mobility of the platform has made it extremely popular amongst casual and professional traders.

It is not only the mobility of the platform and range of products offered that makes webIRESS so popular but it's also the platforms speed, functionality and ease of use. The webIRESS trading platform is one of the fastest DMA CFD trading platforms available, orders are executed in less than one tenth of a second, much quicker than the majority of other platforms. The platforms speed combined with its vast array of order types including trailing stop-loss orders and contingent orders make it the ideal platform for active traders.

The webIRESS trading platform has a number of great features including a market map and ability the see the entire market depth and course of sales of share CFDs, most platforms limit market depth to five levels and course of sales to the last one hundred trades. The market map is particularly useful as it offers a visible illustration of the shares that are moving within a particular sector and the market capitalization of the share relative to the sector. Traders regularly use the market map as a tool to recognize undervalued shares within a sector.

Since the CFDs traded on the webIRESS platform are DMA all orders are transmitted directly to the exchange order book of the stock over which the CFD is based. Being able to participate in the market of the underlying financial instrument means you can be a price maker and trade in the opening and closing phases. These are normally the phases of the market where a large amount of volume occurs, meaning more trading opportunities.

Before you start using the webIRESS platform you should download a demo that will allow you test many of its great features before you start trading for real.

To learn more about DMA CFD trading on the webIRESS platform you should download a free webIRESS demo.

CFD providers all have very different margin rates some offer margins from 1% others start at 5% but are margin rates really important in a well balanced CFD trading strategy?

CFD providers will vary their margin rates depending on the product over which the CFD is based, for example foreign exchange CFDs are typically offered at around 1% margin, the reason for this is simply because the foreign exchange market is the biggest and most liquid market in the world and the risk of currencies gapping is minimal. On the other hand the margin rates on share CFDs will typically vary between 5% to around 35%, the reason for higher share CFD margin rates is because shares tend to be less liquid than currencies. CFD providers will assess the risk of each share CFD individually and adjust the margin to cover the likelihood of the share gapping in volatile market conditions.

In determining the margin rates on share CFDs, CFD providers will generally look at liquidity of the stock, its market capitalisation and its historical price movements. Based on these three main criteria in addition to a few other factors a margin rate will be determined. It is important to note that some CFD providers may offer CFDs on 100% margin allowing them to provide a greater range of CFDs but providing no real benefit to the client.

Index CFDs offered by many CFD providers are a great way of gaining exposure to the overall market without having to buy futures contracts or a basket of shares. Index CFDs are typically offered on margin rates of 1% to 2%, the margin rate will vary depending on the index being traded. 

So how do CFD margin rates affect you?
Of course the lower the margin rate the better you are able to utilise the money in your CFD trading account thus your return on investment (RIO) will be greater, however as CFDs are leveraged instruments it’s not advisable to utilise the full amount of your deposit as margin, doing so would put you at risk of a margin call or even liquidation.

Typically with a good trading and risk management plan in place most CFD traders will allocate one third of their account balance to meet the margin requirements for their open positions, one third will be allocated to meet the margin requirements on intraday positions or opportunistic trades, the last one third remains on call to meet any additional margin requirements on open positions.

In Conclusion
Yes, CFD margin rates are important however leverage is only one of the many tools in a CFD trader’s arsenal and should be used in conjunction with a proper risk management plan and well balanced portfolio. No matter the amount of leverage you are provided if you do not have a trading strategy in place you will not be a successful trader.

To learn more about CFD margin rates and how to develop a trading plan you can download our free CFD Guide.

There are many good CFD brokers in Australia, their active marketing and promotions make it difficult to chose, some have advantages over the others but more often than not it is their fancy marketing makes you confident in your choice of provider.

When you sweep away all of the fog and evaluate each of the best CFD brokers on a few key metrics you will soon discover which provider genuinely suits your trading needs.

There are as few key metrics that you should judge your CFD broker on, these are:

• DMA or Market Made
• Web based or Downloadable trading platform
• Product Range

DMA or Market Made
It is important to ensure that you understand the differences between DMA and Market Made CFDs and the pro’s and con’s of each. DMA CFDs offer a few advantages in that they allow you to trade the opening and close phase of the market in addition to allowing you to participate in the market depth. DMA CFD are popular with scalpers and day traders but are not so popular with traders needing exposure to indices or currencies and wanting to place guaranteed stop loss orders, this is where Market Made CFDs have significant advantages over their DMA cousins.

Web Based or Downloadable trading platform
It can be quite confusing when choosing a CFD brokers platform as each platform has benefits and drawbacks. It is important to consider where you will be trading from as this will decide whether you use a web based or downloadable platform. If you intend to trade from work it would be better to choose a web based trading platform for the simple reason that web based platforms do not require a download, this means that they cannot be blocked by the firewall in an office, however, web based platforms come with some downside also in that they tend to lack much of the advanced charting functionality of downloadable platforms. Downloadable platforms a more suitable for home use as they offer significantly more advanced charts and order types in addition to added features such as back testing and customisable multi screen layouts. Professional day-traders and scalpers often prefer using downloadable platforms whereas casual traders tend to choose web based platforms.   

Product Range
It is important that when choosing the best CFD broker for your needs you should assess the products that they offer to ensure that can provide a range of CFDs that suit your trading plan. Some CFD brokers only offer CFDs on Australian Shares however others offer CFDs over stocks, indices and forex. If your trading plan covers all of these products you should be sure to choose a provider that does not restrict you to Australian share CFDs only.

Of course when choosing the best CFD broker for your trading needs you will need to asses all of the metrics above and make your determination based on your trading strategy. It is also advisable to download a few demo trading platforms available in the market, this will help you better understand whether the platform is suitable for your needs and trading style.

To understand CFDs in more detail and to learn how to develop a trading plan 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.

Compared to short selling traditional shares, CFDs are a revolution for traders who want to make money in a falling market. Short selling with a traditional stock broker is a complicated and costly process, starting with the brokerage. Generally it is charged at full-service rates to short sell. Traders can spend around $75 a trade to enter a short position in a traditional stock. Short selling shares also attracts a higher margin rate. Generally it requires 25% of the value of the underlying position to go short compared to around 5% with a CFD provider. Short selling with a stockbroker is also dependent on the availability of stocks to borrow. If the stock is not available to short sell the position cannot be taken. If the company decides to recall the stock at any time, then the short position is closed out. Short selling a traditional share is also bound by the downtick rule. This means a trade cannot be taken in a stock unless it is the result of an up-tick in the price activity. In a rapidly falling market going short using CFDs has a big advantage, as short selling traditional shares is prohibited.  

There is a famous saying, ‘markets go up by the stairs and down by the escalator’. This means a rise in prices is likely to take longer than the equivalent size of losses. However a market in a downtrend is often subject to sharp rallies also known as the dead cat bounce. A dead cat bounce in a bear market is usually followed by a resumption of the losses. The bear market rally or dead cat bounce can cause, or can be the result of short covering. This is known as a short squeeze and occurs when short traders close out their positions by buying.

All serious traders must be prepared to go short when the market signals the uptrend is over. Every market will enter a downtrend. No stock will rally always and forever, and every bull market is followed by a bear market. A general bear market will provide abundant shorting opportunities. In a bull market there are fewer shorting opportunities, therefore a trader must be more cautious about taking short positions. As a general rule the safest shorting opportunities in a bull market are on the worst performing stocks in the worst performing sector. Traders earn interest from holding a short position. This is a consideration if a trader wants to have a short position for the long term. For example, long term corrections on stocks like Telstra, AMP, Lend Lease provide traders with extra income on top of the profits as a result of the falling price.

Example – short position in Telstra Corporation (TLS)
On 24 June 2010 you believes TLS is in a downtrend and take a short position in TLS share CFDs. You decide to hold the position using a 50c trailing stop loss.

Opening the position

Telstra Corporation is quoted by your CFD provider at $3.13 bid.

You sell 10,000 Telstra share CFDs at $3.13. The total value of the trade is:
$3.13 x 10,000 = $31,300

The margin required to open the position is 10% of the total value of the trade and is calculated as follows:
$31,300 x 10% = $3130.00
    
Whist short you will earn interest on the trade at a rate of 3.24% per day calculated as follows:
$31,300 x 3.25% / 365 = $2.78 per day*
    
*This will vary according to the daily closing price of TLS

Closing the position

Telstra Corporation makes lows of $2.25 in August. A stop is then moved down 50c above this level at $2.75. The market does not go any lower before reaching the level of $2.20 on 24 August.

You now buy 10,000 TLS share CFDs at $2.20. Profit is calculated as:
($3.13 – $2.20) x 10,000 = $9,300

The position earns interest of $2.78 per day for two months:
$2.78 x 60days = $166.80 approx

Your total profit on the trade is:  
$9,300 + $166.80 = $9,466.80 approx*

*should the position have moved against you, you would have incurred a loss on the trade.

You can find out more about how you can use CFDs to short sell in our free CFD Guide.