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Let's start with a briefing on Contracts for
Difference [better known as CFD's]. This is another trading instrument
you may use instead of Dow E-Mini’s or ETF’s, to trade the Dow…
In many respects, a CFD works very similarly
to the E-Mini future, except that the spreads can be a little wider [the
bid-ask spread on an e-mini is typically 1 point, whereby the spread on
a CFD can be around 3-4 points, which can be more expensive, but with
CFD’s often the deposit/margin is considerably lower than the E-Mini,
almost half!].
Take a quick look further down this page for
web addresses of CFD dealers, who provide full information on how a CFD
works...
A Contract-for-Difference is exactly as the
name suggests. Whenever you think [your opinion] the Dow is going to go
up, it is very likely that somebody somewhere will take an opposite view
to you, and think that the Dow is going to go down. This creates an
opportunity to place a type of cross-trade of ‘differences in’ opinion,
if you will…
Taking a quick example... Assume, on Monday
you saw a BUY opportunity in the Dow on your screen, which tells you
that it is likely to go up. Somebody else, an individual just like you,
somewhere [anywhere in the world] thinks the Dow is going to go down,
for whatever reason...
Now, in order for the two individuals to do
a trade, one needs an ‘agent’ who puts the person who thinks the market
is going to go up [you] with the person who thinks the market is going
to go down [the other person]. This agent is the ‘broker’ or better
known as a CFD-dealer. With state of the art computers, this 'agent' can
see on his screen any person who wants to back his judgment that the
market is going to go up, and another person who wants to back his
judgment that the price is about to go down. The agent can potentially
put the deal together, run a 'book', so to speak.
You can trade any leading stock using the
CFD. And indeed, you can simply trade the Dow [or any other popular
index].
Assume the Dow stands at 10800 points, you
think it will go up, and the other person thinks it will go down. Now,
once you enter the market to take an ‘up’ position, the CFD-dealer
simply matches you with the person who is taking a ‘down’ position. This
matching thus neutralizes the dealers’ position so his risk is zero. He
is simply the ‘middleman’ or matchmaker. For his trouble in matching the
two parties, he charges what is known as a ‘spread’...
So, with the Dow at 10800, he will quote two
prices, eg., 10798-10802. This means [just like an E-Mini] 10798 to take
a 'down' position, and 10802 to take an up position. That is a
difference of 4 points. This is simply his profit margin [similar to an
estate agent or realty agent who puts a buyer and seller together and
takes a tiny 'cut']. There is always a two-way price quote [or bid &
ask]…
In this example, the person who takes the
‘up’ position buys at 10802, the other person takes the ‘down’ position
at 10798. The difference of 4 is the market-makers commission/cut.
If you wish to learn more about CFD’s, check
out the following websites, which offer full, detailed information
[including examples] of CFD stock trading. You will also find their buy
& sell ‘quotes’ [similar to the 10798-10802 example above] online…
Worldspreads.com
Onlinecfds.com [click on “About CFD’s”]
Etrade.co.uk
Cityindex.co.uk
Deal4free.com
Cmcmarkets.com
Gnitouch.com
Igmarkets.com
Full information packs and demo CD’s, dummy
software trading platforms etc., are all supplied by most
dealers/brokers free of charge. All you need to do is request online or
by email. You may [if you wish] open an account online in a matter of
minutes.
A plus point about CFD's [depending which
way you look at them] is that they also offer 'margined' trading. You
need only put up small margin requirements to trade them. For instance,
worldspreads require 150 points x your $per point position to cover
initial deposit/margin. So, if you trade at $5 per point, then that
means deposit = $5 x 150 = $750, which is less than half that required
to trade the E-Mini. However, on the flip-side look out for wider
bid-ask spread margins, which is effectively a ‘cost’.
Please note that CFD trading does require at
least some experience from the brokers, to prove that you do fully
understand the risks/rewards of this instrument [this experience could
be in trading shares, or spread-bets, Dow futures, ETF’s etc.
An Introduction To Spread-Betting...
Not one of our favorite vehicles to trade
the Dow, we will still cover this final instrument in detail here, so
you have a rounded knowledge of what is available to trade the Dow…
Similar in some respects to the CFD, spread
betting can be done on a large number of stocks and indexes [including
the Dow]. Some of the better websites to visit, in order to start
learning how to profit with spread betting is www.cityindex.co.uk
[simply click on the “Learn More” tab] or www.deal4free.com, and
www.worldspreads.com each of whom offer quick-learning pages on their
sites.
We start with a few opening basics about
spread betting…
Firstly, do not be put off by the word ‘bet’
which carries for many people, a number of totally unnecessary, negative
connotations and preconceptions. It is probable, the reason for
classifying this instrument as a 'bet' is the tax-free status that it
affords.
Spread betting is not like traditional
betting, where a ‘bookmaker’ gives you ‘odds’ and usually ends up taking
100% of your original outlay. Spread betting is, in a nutshell, the
offering of a ‘middleman’ in a cross-trade [very similar to CFD’s]
between one party [you] and another party [another person like you who
takes an opposite view on a stock price]. This is just like a CFD. To
explain further...
For example, if you bet that XYZ stock [or
index] will go up, then, unlike traditional betting, you are not
betting against the dealer, but someone else [another trader just like
you who could be on the other side of the world] who has an opposite
view of the market [he or she obviously thinks XYZ stock is going to go
down, while you judge that it will go up]. For every pound won, there is
a pound lost [or for every winner there is a loser, as the saying goes]
- as in every other stock market transaction…
The spread-bet dealer is therefore simply an
intermediary [rather like a broker] between the two parties. He is
neutral. This is as simple as it gets, and creates a tradable
marketplace where the spread bet dealer, a middleperson, employs a
rather sophisticated electronic-book system which matches the buy/sell
orders throughout the trading day [even overnight in some cases]
automatically and instantaneously.
To spread-bet, you deal through a spread
bet-dealer. There are a number of these in the city of London. These
dealers will send you a full, detailed, easy-to-understand information
package which covers just about everything you need to know [including
many trading examples and illustrations, etc.] in order to start
spread-betting.
Below is a listing of the many leading
players…
Finspreads.com
Cityindex.co.uk
Financialspreads.co.uk
Igindex.co.uk
Spreadex.co.uk
Deal4free.com
Worldspreads.com
Cantorindex.com
Similar in some respects to ‘CFD’ trading, you can use spread betting to back both rising and falling markets. Remember though, that spread-bets are more geared towards the beginner. They tend to have wider buy/sell spreads, but on the plus side, all profits are currently tax-free. Food for thought.
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