CFD or SB which is it to be?
OK, before I drawl on, when I talk about CFD's please take this to mean a commission broker who mirrors the level 2 prices NOT a market maker who skews the prices. After much looking I like the look oe Etrade but am still looking so if anyone has good/bad or ugly experiences please post.
OK, to my point, sorry to be lengthy.
Unless I am missing something fundamental it would seem to me that CFD’s are potentially less profitable than Spreadbetting.
I accept that CFD’s have other advantages such as Level 2 (generally) prices so you can trade using real time analysis at the price you see.
Bear with me and then please check my analysis. If I am wrong then please correct me, if not then please give me a good reason to change to a CFD platform.
OK, let us assume I have £30,000 as a trading bank. As a conservative trader I will only risk 3% on my bank on any 1 trade so my risk is therefore maximum £900.
ADC ltd is at 354 and I see it as a buy. I decide to set the stop @ 340.
So to the platforms, lets ignore the spread:
SB:
My max allowable loss is £900 and my stop is 14 away from the buy which equates to £64 per point (900 / 14)
If the trade goes against me I lose £900 (64 times 14)
If, as I expect the trade goes well, say to 370 I decide to sell, 16 points to the better.
I will make 16 times £64 = 1024.
Same scenario with CFD’s.
If my max loss is fixed @ £900 then I can buy 6430 (approx) CFD’s:
Diff between 354 and (SL)340 =£0.14, (£900 divided by 0.14)
Trade down to SL:
Loss = 0.14 times 6430 = £900
Gain to 370:
Diff = 370 – 354 = £0.16 times 6430 = £1028
So far so good? We are making almost the same amount on either platform. We get a slightly better spread on CFD’s and more accurate fills.
Now lets look at the charges.
On the SB platform, that’s it, nothing.
On a CFD platform the best I have found is ETrade who charge £10 in and £10 out. Plus financing. OK lets assume the trade is only a few days and therefore the financing charge is something like 6.5% per year. On the above example it would be only: 6430 times £3.60 (taking and average) times 6.5% / 365 times (say) 3 = £12.
So now our £1028 looks like £996.
A difference of £28.
I suppose one could argue that this could easily be offset by the better spread on the CFD?
Comments welcome.
Dave