Benefits & Risks
CFDs appeal to a wide variety of individuals who want to take advantage of the versatility and great value that CFD trading can offer. You do not need to be an experienced investor to trade CFDs, but you do need to research the products that you wish to trade and be aware of the risks associated with CFDs.
The following reasons explain why CFDs might appeal to you:
Bull or Bear
One of the most obvious advantages of CFD trading is the opportunity to either long (or buy) or short (or sell) the market. You can therefore profit from both rising and falling markets.
Many investors use CFDs to hedge their existing share portfolio. For example, if you have some shares which are decreasing in value in the short-term, you could “Sell” the value of the share with Capital CFDs and possibly make a profit to counter-balance the decreasing value of your shares.
A Contract Size of Your Choice
Capital CFDs also allows you to trade in sizes smaller than those usually available in the underlying market.
Trade on Margin
CFDs are margined trading products, which means you need only deposit a small percentage of the full value of your trade For example, a 100 CFD trade on a share is the equivalent of buying (or selling) 100 real shares. Our minimum Initial Margin Requirement (deposit) on shares starts from 3% of the underlying value of the shares, which means that you can make a trade in a share with as little as 1/30th of the money required to buy the actual real shares from a stock broker.
At Capital CFDs, we offer very competitive commission rates on Australian shares. With all the other instruments, our dealing costs are built into the spreads that we apply to the underlying market prices.
Alternative to Traditional Stock Broking
The table below illustrates how a share investment held over night might compare to if it was done as a CFD trade.
|Traditional Stock Broker|
|Buy 1,000 shares @||$10.00|
|Sell 1,000 shares @||$12.00|
|Net Profit Before Taxes||$1,960.00|
|Return on Investment (ROI)||19.60%|
|ROI working: 1960 ÷ 10000 x 100%|
|Buy 1,000 CFDs @||$10.00|
|Sell 1,000CFDs @||$12.00|
|Net Profit Before Tax||$1,988.22|
|Return on Investment||198.82%|
|ROI working: 1988.22 ÷ 1000x 100%|
* Assuming the minimum Initial Margin Requirement (IMR) is 10%. Please note you can lose more than this deposit.
** Overnight financing charges apply to long positions held over night and are calculated and charged to the trading account on a daily basis. The interest rate is the official cash rate in the relevant market + 2% (for long positions). In this example it is assumed that the official cash rate is 4.5%, the financing charge is applied at 4.5% + 2% = 6.5% p.a. The charge is calculated as 10000 x 0.065÷365 =$1.78
• Remember that the risk is still the same for either scenario. For example, if the company you were trading on was to go bust and its share price plummeted to $0 overnight, you would still be liable to a $10,000 loss with Capital CFDs and not just the 10% deposit of $1,000.
• As with all CFDs you do not own or owe the underlying asset. So, if you open a buy CFD on a share you will not have any voting rights.
AFSL holders are regulated by the Australian Securities and Investments Commission (ASIC). Capital CFDs is the trading name of London Capital Group Pty Limited, a company incorporated in Australia (ABN: 85143553628) and a holder of an Australian Financial Services Licence (AFSL 364264) issued by the Australian Securities & Investments Commission (ASIC).
What’s more, you can rest assured that that your funds are safely held in a segregated client account at a top-tier Australian bank, in accordance with the governing legislation and our Customer Agreement. By way of further protection (and in excess of our contractual and regulatory obligations), we use our own money, not yours, to meet our trading obligations with our hedging brokers. We also segregate and hold in trust your net running profits.
Whilst CFDs offer many benefits, it is important to note that it carries a high level of risk to your capital, so you should only trade with money you can afford to lose. Capital CFDs has a policy of attempting to limit client losses by applying an automatic stop loss to each trade you open. Please note that these automatic stops are not guaranteed. In the even of market gapping these orders may be filled at the next best available price. If you prefer to have your stop loss price guaranteed, you can place a Guaranteed Stop Orders order at a premium. For more information please refer to the Market Information Sheet. There are a number of other risks that you should consider prior to trading CFDs:
The Leveraged nature of CFDs means that a relatively small move in the price of the underlying instrument of a CFD can cause an immediate and substantial loss to you, including a loss far greater than the amount of your initial investment. If you had a long CFD position with the total value of $20,000, and if the company in question was suddenly to go bust and the shares became worthless you would lose $20,000. Below is a comparison of a losing stock trade and a losing CFD trade using the same assumptions as the examples above:
|Traditional Stock Broker|
|Buy 1,000 shares @||$10.00|
|Sell 1,000 shares @||$8.00|
|Net Loss Before Taxes||$2,040.00|
|Return on Investment (ROI)||-20.40%|
|ROI working: (-2040) ÷ 10000 x 100%|
|Buy 1,000 CFDs @||$10.00|
|Sell 1,000CFDs @||$8.00|
|Net Loss Before Tax||$2011.78|
|Return on Investment||-201.18%|
|ROI working: (-2011.78) ÷ 1000x 100%|
Stop Loss risk
Capital CFDs has a policy that requires a mandatory "stop loss" on every open position. Subject to holding sufficient funds in your account, you can alter the level of this stop loss to suit your trading strategy but the stop loss cannot be deleted. This means that if you do not have the required funds in your account to move this stop loss or if the level of the stop loss is breached prior to you moving this stop loss, then the position in question will be closed out, which may pose a risk to your trading strategy. The mandatory stop loss is not guaranteed (see Gapping Risk below). Consequently, you can lose more than your initial investment. Capital CFDs also offers Guaranteed Stop Orders at a premium whereby your losses are capped at your chosen level.
Gapping refers to an occurrence whereby the market moves from one price directly to another significantly different price. There can be many reasons for gapping: economic figures; company announcements; political events; natural disasters etc. When this happens an order will be executed at the Capital CFDs quote based upon the first price that Capital CFDs is reasonably able to obtain on the underlying market. We offer Guaranteed Stop Orders which eliminate slippage risk as your maximum losses are then limited to your chosen stop level. Please note a premium is charged at the time of placing the Guaranteed Stop Orders and is not refundable if it expires or is cancelled.
Example of gapping
You have a long position in PQR Ltd, having bought 1000 CFDs at 20.32 with a stop loss set at 19.32. The price of PQR shares dropped through the 19.32 level on the back of a profits warning. The first price that Capital CFDs can reasonably offer after the announcement of the profits warning is 19.07-19.10. Rather than your position being closed at your stop loss level of 19.32 it is closed at 19.07 , meaning that due to gapping you have incurred a loss which is $250 more than the loss you would have otherwise suffered had your position been closed at 19.32.
As Capital CFDs is your counterparty to all CFDs you trade with us, you are exposed to the risks of dealing with Capital CFDs. This means that if we were to become insolvent or otherwise unable to perform our obligations to you regarding our CFDs, you could suffer loss or damage, for example if we were unable to pay you any amounts we owe to you.
The CFDs provided by Capital CFDs are over the counter (OTC) products. This means that they are not traded on a licensed financial market such as a stock exchange. Therefore, by trading in OTC CFDs with us you will not have access to some of the advantages of trading on a licensed market, such as having a central clearing house to guarantee our obligations to you regarding our CFDs.
Foreign Exchange risk
CFDs are typically denominated in the currency in which the underlying financial instrument is denominated. For instance, if you were trading in a CFD which had the United States DOW index as its underlying financial instrument, you would be trading that CFD in USD. Whilst trading in foreign denominated CFDs you are exposed to foreign exchange risk, which is the risk that the proceeds of the trade may not be worth as much as they would have been at the onset of the trade due to a potential adverse movement in the exchange rate.
Customer Money risk
We will hold money you deposit with us in one or more separate segregated customer accounts with an Australian authorised deposit-taking institution (ADI). These accounts are operated as trust accounts and the purpose of the segregation is to hold customers' money separate from our funds. Customer money is pooled together in these accounts as permitted under the Corporations Act 2001. We do not use the money in a customer money account belonging to one customer for meeting the margin obligations arising from dealings on behalf of another customer. As all client money is segregated, in the unlikely event of Capital CFDs becoming insolvent, deposits lodged in the customer accounts would be protected. This includes funds used to cover open positions and unrealized profits. The segregation of unrealised profits and desegregation of unrealized losses is performed each Business Day. Capital CFDs banks with ADIs and therefore, although considered minimal, there is a risk to customer monies held in the event of an ADI which maintains our segregated customer accounts becoming insolvent.