I am a small-time player. Initially, I was thinking of trying out futures to trade indices. Unfortunately, the contract size is too huge for a small player like me. I stumbled upon CFDs which offer smaller contract size. Looks good initially until I discovered the interest charges. When trading index futures, there is no need to pay interest. Based on what I have read, it seems that I cannot avoid paying interest charges when trading indices using CFDs. Am I correct? I am using Interactive Brokers.
You are correct. For all instruments including futures there is always two sides: you give up something to get something else. So for CFDs you give up a notional amount of cash (ie IB lends you the money) to buy the asset. Futures are the same but instead of your broker charging you the interest on the money borrowed to buy the asset, it is included in the price of the asset. Because futures are anchored on a spot price in the future they also include the dividends payable between now and then. So, often the future price is actually below spot because dividends expected to be paid are greater than the interest earned on the notional amount. Whenever possible you (as a small trader) should trade futures because the funding cost is less than your broker would charge you. So for example if you bought the CFD and sold the future at exactly the same time you would basically lose an amount equal to your brokers markup on their loan to you on the CFD. Same way other way round.
Thanks for your reply. For a small trader like me, even the E-mini contracts are too big for me. The European minis are more acceptable. Futures are regulated. CFDs are not. Given a choice, I will choose a regulated platform anytime over an unregulated one. Unfortunately, I may have to resort to CFDs given the contract size issue. I do not know any other way to get around this problem.
Deep ITM options vs CFDs on indices which do you think is best for 1h-7days directional bets ? in terms of leverage and costs. haven't been able to figure this out
Hi learner88, I see you are from Singapore, so you have several CFD providers to chose from. CFDs may not be as regulated as futures markets (if you chose a good UK based broker you have at least some kind of regulation), but you also have several advantages. Much more flexible position sizing for example. And there are some CFD providers that offer you a negative balance protection, which means even with a heavy move against you, you can never lose more than the cash that you have in your account with them. If you want to trade an index via CFD, I would suggest the german DAX. Lots of volatility, good ranges and very low cost to trade. With a good CFD provider you will usually have a spread of about 1 indexpoint, which is very little in relation to the moves one would want to go for in the DAX.
It's correct, the regulatory environment matters more. I have accounts with IB USA and Oanda Singapore. I chose Singapore for FX very deliberately, they jail bankers and close banks there, unlike other places. Just look up 1MDB Singapore to see how quickly they have handled it while the US and others are 'still investigating'. As for the interest charges, pardon me, don't make the mistake of worrying about the cost of doing business. I honestly don't know what I'm charged for comms or interest. Look, if you make $100 a trade and you do that twice a day and you trade 252 days a year, you make 504 trades. If you pay $6 in comms and can reduce to $4, you save $1,008 a year. I'd do it, it'll buy a few bottles of whisky, but first I'd worry about making the $100 a trade. You see, losing just 10 trades at $100 a trade is that 1 grand and all the whisky gone. When I'm making the money, I'll worry about the fine tuning. I watched a HBO documentary Sunday, Becoming Warren Buffett. When Gates and Buffett were asked to write just one word to describe the source of their success, they both, without discussion, wrote "Focus". Focus on being profitable, sweat the small stuff later.
CFD interest rate is ~3%. That is 30% of your money (given 1:10), and if the underlying grows, so is interest. So you have to be constantly profiting 30% per year just to get breakeven, if CFD is the standard choice of vehicle, especially on the long side and swinging. Sweat the small stuff before, or check yourself before you break yourself. CFD is useful only for day trading.
Depends on your point of view...if you are a serious trader, cost is a huge issue. If you are a recreational trader (probably a loser), then yeah i suppose it doesn't matter.