How do cfds actually work?

[Lisa]

How does this actually work --- can you predict the price of wheat will go down next month etc and if it does you would get X amount etc if it goes down u lose ur inital money plus how ever much it went down.

[nadine]

Contracts for Difference or CFD's are currently the best investment/trading tool available, in my opinion, and I think they will be for a very long period of time.

They mirror the price movements of the underlying equity. That's it. You trade them just as you would trade normal stocks but you don't have any voting rights. The great thing is that you purchase them with margin, they are derivatives.

For example:

If VOD stocks trades up 3 pence from 185p to 188p then your VOD CFD will move up 3 pence from 185p to 188p.

If you know how to trade/invest normal equity shares then you know how to trade/invest CFD's. There is no secret to it. You need to know how to manage margin and avoid margin calls and then you're good to go.

[Lisa]

Just so i can get a general understanding what fees are contributed to CFDs.

Also what reports and prep can you do to suggest lets say which way copper will go in one week.

[nadine]

Fees are dependent on your broker but they should be minimal. Some charge a flat fee, i.e. 10 pounds, 15 pounds etc. per transaction and some charge a percentage of the total amount, i.e. 0.10%, 0.15% etc. per transaction.

To answer your second question, well it depends on your trading strategy. I think that's a question many want to get answered but you probably won't find an exact answer. Any sound investment company will keep that as a heavily guarded secret.

You can't ask the Coca-Cola Company for their secret recipe on how to make your own coke, you pay 'them' and they will 'make' the coke for you and the same holds true in the investment industry.

You will know the ingredoents of coke but you can't put it together.

So, to give you the same info with your question:

Look at technical analysis if you want to predict short-term price movements. Keep in mind what type of commodity copper is and then you'll know what reprots will influence its price movements as well.

Those are the main 'ingredients'.

Hope this helps.

[Lisa]

What general reports do you think i should read to make a start on it.

Also if you go long u can take a percentage of the dividend how does this work as you own the shares , do you only own the difference . So the stock broker is basically edging his bets utilizing cfds.

[nadine]

The broker only gets paid a commission, that's it. If you go long you pay for financing, if you go short you get paid.

You don't own any shares, you purchased CFDs. If you go long and the company pays a dividend you get that dividend, not a percentage of that and if you go short that dividend will be subtracted from your account.

Here is an example:

If you go long and have 2000 CFDs and the company pays a dividend of 10p per share you will get paid 200 pounds.

If you go short and have 2000 CFDs and the company pays a dividend of 10p per share 200 pounds will be deducted from your account.

Financing is paid ever day you hold the CFDs.

Like I said before CFDs work exactly as normal equity shares but keep in mind that they are derivatives and traded on margin.

[Lisa]

Ok this is how i see it . Take ABC company trading at 1 dollar per share. You decide to buy one million shares and go long with an inital investment of 100k.

If the share price goes up to 1 dollar and 50 cents then you will have a profit gross of 500,000 dollars.

The one thing i dont understand is that you say if you go long then you entitled to the dividend for how many days you have owned the CFD whereas the opposite is true if you go short. Is this the whole dividend as if you actually bought 1 million pounds of shares. If so where is the incentive of going short.

I always thought you had to legally own part of the company to recieve divdends hence i cant see how the monies passes to you if you dont actually own the shares.

Is the commission you initially pay the broker for the CFDS a payment that you will never see again . Thereby CFDS is a way for stock brokers to edge their bets on stocks and commodities.

[nadine]

any broker will charge commissions. They don't edge their bets, that's what they, why should they allow you to use their trading platform for free?

Your profit example is correct but remember you purchase CFDs and not shares. That is a big difference and you need to be aware of that fact. You are able to buy one million shares but I doubt that you can purchas one million shares with one purchase. Having said that, in essence you're example is correct.

Dividends have nothing to do, I mean noting at all, with the days you maintain your position. Each company has an ex-dividend date and if you go long before that day you are entitled to that dividend but you would be a fool to enter a long trade one day before the ex-dividend date.

Your incentive, regardless if you go long or short, should always be to make money but to further explain this it comes down to strategy.

CFD's completely mirror the price movements of the equity they represent. With CFD's you trade prcie movements and dividends, stock-splits, etc. affect the price of the equity and therefore the price of the CFD and that is why you are entitled to dividends when you go long and subtracted the dividend if you go short.

Personally, I think you are making a very big mistake by trying to spread your focus on everything. You are all over everything the investment spectrum has to offer. I would suggest that you sit down, decide what you want and than continue to research on what you have decided.

I may be wrong but is seems that you favor commodities. If that is true then stick to that, forget the rest for the time being.

What reports should you read?

Depends on what commodity you want to trade. I would never suggest that a novice should start out with commodities but that is something you need to decide.

[Lisa]

Here's another example i hope is correct.

Say ABC company is one dollar a share and you pay 1 million for 10 million cfds. Say in the 3 rd week the price goes up to 2.5 dollars and a dividend is paid for 10 cents per share does that mean you have made 60 cents per share for going long and and loose 70 cents per share for going short

Does Figuring in a stop loss incur more commissions

Also how much of the 1 million invested does the stock broker keep.

regarding reports , Just out of interest what reports correlate to which commodities as i think its good to compare commodities then and only then do you know which ones are in more demand and more useful more scare than the others or over valued or undervalued etc.

[nadine]

Your example makes no sense at all. Sorry. Besides the fact that your example makes no sense I don't even understand it. Maybe you have made a mistake with the numerbs which would explain it. You can't go short and long the exact same CFD in the same account at the same time. Once again you won't buy 10,000,000 CFDs.

Yes, stop-loss will cost you extra.

Why do you think your broker will keep anything? Where do you get such info??? Your broker gets paid a commission and that is it.