Introduction – CFD Questions and Answers
We speak to Martin Slaney; a person who has been involved in the brokering industry since 1995.
Editor: Having traded traditionally in shares for years, why might I be interested in progressing into a different type vehicle i.e. contracts for difference trading?
Martin: CFDs offer many advantages over traditional share trading, including the use of leverage, or gearing. This allows customers to trade larger positions with smaller amounts of capital. For example, some markets such as FX require only a 1 percent margin, so you can receive up to 100:1 leverage. Of course, with the use of leverage, you are also exposed to a higher level of risk.
You can access many markets via CFDs, as investors can trade CFDs thousands of financial products, including shares, indices, currencies, bonds, interest rates and commodities. You can trade CFDs on the indices and individual shares from the FTSE, S&P, NASDAQ and more.
Another benefit of CFDs is the tax advantages. Although tax laws can change at any time, in the UK there is currently no stamp duty on CFDs because it is a derivative product. This has the potential to save an active trader significant funds over the course of the year.
Editor: For someone located in the UK, what advantages do contracts for difference have over other trading vehicles such as spread betting? How do they compare?
Martin: The advantages aren’t obvious but are worth pointing out. First of all, the trading sizes in CFDs can be more flexible than with spread betting. Additionally, when trading CFDs, you trade in the same currency of the underlying market, and many traders prefer to mimic the underlying market as closely as possible – whereas with a spread bet you are trading with the one currency in which your account is denominated, usually sterling.
In the last few years we have seen great interest in FX CFDs. With these, you can trade spot FX without the hassle of rollovers – so your position remains open at the original trade price. This results in greater transparency and makes it much easier for our customers to track their P&L.
Editor: Who uses which – as far as spread betting and CFDs are concerned?
Martin: Customers in the United Kingdom typically use spread betting, while CFDs are more popular in other regions, such as Europe and Australia.
Editor: How much experience do I need to have in traditional share trading before considering CFD trading?
Martin: Since the introduction of MiFID (Markets in Financial Instruments Directive), all applicants for CFD as well as spread bet accounts are assessed on their suitability. Previous trading experience will certainly be relevant to this assessment.
Editor: How do margins on CFDs compare to spread betting?
Martin: They are no different and are based on a percentage of the market price.
Editor: Are there any differences between live and demo accounts?
Martin: The trial version is very similar to the live platform. We use mostly live streaming prices for the trial version, although the liquidity may not always reflect that of the actual market. However, it does give you a great feel for our platform. You can familiarise yourself with the workspaces, charts and order capabilities before trading with real money.
Editor: What are the minimum/maximum trade sizes? Do you notice any customer tendencies when the trade sizes are raised in terms of customer confidence/strategies?
Martin: The minimum for all markets is one CFD. This does give customers the opportunity to start with very small comparative trading risk. Of course, a natural element of any successful trading system is dealing with the psychological demands of increasing one’s trade size, and has to be very carefully applied.
Editor: It is mentioned that some providers will allow customers to go all the way to £1000/pt! Please comment.
Martin: Maximum trade sizes vary according to the market. Actually for many indices we can go much higher. As a market-maker we often choose to take on larger trades than would be available in the underlying market. This is one of the foremost advantages of our model over the DMA model.
Editor: Some CFD providers utilize a dealing desk, meaning that in certain circumstances a dealer may re-quote you. In which circumstances will this happen?
Martin: Whilst we endeavour to keep the amount of requoting down to a minimum, in circumstances where the price you are trying to deal at is “off market,” i.e. different to the current quote, then this may occur. This works both ways of course – we often requote people a better price than the one they originally clicked on.
Editor: What instruments are best suited to beginners? Indices, equities, shares, forex?
Martin: Whichever instrument you know best, and are most comfortable trading!
Editor: How is CFD trading commonly used? For hedging or speculation?
Martin: Despite the natural attraction of CFDs as a means to hedge one’s portfolio, speculation is by far the most popular reason for CFD trading.
Editor: What happens should I have a CFD trading position in a quoted company and the company goes into administration (or is liquidated)?
Martin: With any corporate action, we will mimic what happens to the underlying shares. So in this example, the likelihood is that the position would be worthless, and would thus be closed at zero.
Editor: Is there a greater inherent risk in shorting shares? Please comment.
Martin: The risk profiles for long and short trades do differ. The most obvious difference with shorting a share is that profits are limited but losses are theoretically unlimited. Secondly, short sellers are more prone to sporadic spikes against them in an equity’s price as a result of M&A and takeover rumours. Of course, squeezes such as these which go on to be unfounded can themselves present the shrewd short-seller with additional trading opportunities.
Editor: There are now an increasing number of CFD providers in the UK, and fierce competition is driving spreads down. Do you believe that the market is growing sufficiently to support this number of providers?
Martin: Although the United Kingdom may see some sort of short-term consolidation, with some of the bigger providers setting out on the acquisition trail, there is certainly still room for the CFD market to grow in the United Kingdom. The demand is there. Globally, I expect the CFD market to see continued high rates of growth for many years.
Editor: More and more retail investors are switching to CFD trading. This shift away from share trading to dealing in derivatives concerns some observers as it takes liquidity out of the cash market, particularly for smaller stocks. Please comment.
Martin: This kind of view is rather short-sighted and is often touted by naïve stockbrokers who believe they are losing business to CFDs. If they are losing business, it is because of the attractiveness of the CFD as a product and many brokers are now adding the CFD product to their standard physical share trading range. CFD-related business now purportedly accounts for up to 50 percent of business done on the London Stock Exchange. It’s difficult to see how that is reducing liquidity.
Editor: Have you any parting words for our readers?
Martin: I hope I have been of some help to all those who are interested in CFDs as a trading tool and I thank your readers for their interest.
Thank you for your insight and time, Mr. Slaney.
The Man – Martin Slaney
Editor: How long have you been in the brokering industry?
Martin: Since 1995.
Editor: What does your average working week involve?
Martin: Long and often irregular hours are the norm. We are a 24-hour business, and I often need to speak to our Sydney and U.S. offices, so flexibility is key.
Editor: What effect has your role had on your lifestyle?
Martin: Total dependence on my BlackBerry®!
Editor: If you could go back in time and witness one event in history, what would you go back and see?
Martin: I always would have said, “see Led Zeppelin live,” but I have just been incredibly lucky to be at their reunion concert and lived the dream.
Editor: Tell us about your worst investment… and the lesson you learned from it.
Martin: The tech stocks of the 1990s provided several hiccups in my trading history. As with any market, be it financial, property or otherwise, you learn that bubbles cannot last forever.
Editor: Does the Loch Ness monster exist?
Martin: Whether or not it does, I enjoy watching all the videos where people claim to have caught Nessie on tape. Some remarkable ingenuity and creativity goes into some of them.
Editor: Do you favour technical or fundamental analysis?
Martin: A combination of both: bias towards the fundamental with an awareness of the technical.
Editor: What qualities separate winning traders from losers?
Martin: Discipline and commitment.
Editor: Do you have a ‘favourite’ trading rule?
Martin: Don’t fight the trend.
Editor: Do you think discipline is that important?
Martin: Without it, your trading relies on luck.
Editor: What other attributes do you consider essential?
Martin: Commitment to the cause.
Editor: Are you optimistic or pessimistic about the UK stock market over the next 12 months? And why?
Martin: I am personally moderately bearish, but I think volatility will be king of all markets for 2008.
Editor: Make a suggestion to the chancellor of something to include in the next budget?
Martin: Less red tape.
Editor: What books, seminars, and/or courses would you recommend?
Martin: My bible, which has been reread to death, is Market Wizards by Jack Schwager. This book includes invaluable advice from some of the world’s most successful traders.