An Introduction To CFD Trading

Posted by man on 25 December 2010

Here’s a very simple yet useful tutorial on CFD trading which will get you up and running very quickly if you’re new to CFD trading.

When you finish this article, you’ll know how CFDs work, what makes them highly profitable, and understand the costs involved in CFD trading.

CFD stands for Contracts For Difference, which is a derivative product, where you profit from changes in the prices of stocks and shares.

For instance, if you buy a CFD on a stock that’s $5.00 and the price rises to $5.50, then you profit from that change in price. Thus if you purchased 1000 CFDs, then your profit is $500. That is, the value of the CFDs mirror the underlying stock prices, and you can profit on this movement.

The main reasons why CFDs are a very popular trading product, and understandably so, are:

1. CFDs are traded on leverage, and this leverage is typically 10 to 1, with a few CFD brokers providing 20 to 1 leverage. This implies that a trader with a small float can make decent profits from trading the stock market by using CFDs. For instance, you might have a stock trading system that makes a 30% return each year. On a $5000 float, this is $1500 profit in one year. With CFDs, because of the leverage, the same system can right now produce a 300% return, that is $15 000 profit in one year.

2. You can just as easily short sell CFDs as well, and therefore profit from falling markets. This greatly increases the profitability of a trading system because trading opportunities increase dramatically, and the fact that you can profit from both bull and bear markets.

3. The costs in CFD trading are reasonably low in comparison to stocks. This is particularly so, since for a similar and often smaller cost per trade, you can gain 10 or greater times the results from a trade due to the leverage available. The two main costs in CFD trading are interest and leverage. We’ll come to these in a moment.

4. You can set automatic stop losses. This implies that it’ll take you less time to trade, remove the emotion from exiting a trade when you should, and enable you to exit as the stop is hit, not a day later. You thus avoid the slippage because of getting out of a trade later than when you planned.

5. You can place all of your orders in the evenings. With many CFD providers, you can place orders to enter a position the night before. For individuals who are working, this is a great advantage as they can do all their trading (place their orders to enter and their stop losses) in the evenings, and not need to be at the computer screen or call their broker during the day. Also, if they have any stop losses that need adjusting, they can do this in the evenings as well. Their trading routine with a mechanical system could be about 10-15 minutes per day.

So these are the advantages of CFDs that have made trading accessible to a lot of people since they provide large returns for a modest float, and can be also traded once a day also.

Now, we mentioned that there are two main costs in CFD trading. Let’s have a closer look now at each of them:

1. Commission. With a few CFD providers, there is actually no commission. This also significantly boosts the profitability of your CFD trading systems, and also the fact that you can benefit greatly from the leverage. With other CFD providers, there might be a commission of say 0.15% of the trade size or $15, whichever is greater, each way. These costs are similar or less than the commission related to stock trading, particularly when you consider that the multiplied profits that the leverage gives you.

2. With CFDs, there’s interest charged for long positions that are held overnight. For short positions, the interest is paid to you. The amount of interest charged is normally a reference rate plus roughly 2%, and the interest paid is usually similar reference rate minus roughly 2%. And the reference rate is usually a major bank’s overnight interest rate.

For example, the interest rate charged for overnight held long positions may be 7.5% or 0.075 per annum. To calculate how much this is for a trade, we need to make it “pro rata”. That is, we’d need to divide the 0.075 by 365, multiply it by the number of days in trade, then multiply it by the trade size. For example, for a trade size of $10 000, held for 14 days, the interest cost is around $28. Not an enormous cost. For a short trade, the interest is paid to you, so will offset the cost as opposed to contribute to it.

So there you have it.

You now understand the advantages of trading CFDs and why they’re a trading instrument that permits people with a modest float to make very decent returns, and also understand the costs involved with trading CFDs.

Toget more information about CFD trading, look out for part two of this article.

If you would prefer to learn more now regarding CFD trading, go to this page with a comprehensive tutorial on CFD trading.

Getting the best information on CFDS is no easy task nowadays.

If you are looking for more information on CFDS, then I suggest you make your prior research so you will not end up being misinformed, or much worse, scammed.

If you want to Compare CFD providers, go here: Compare CFD providers

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401K Contribution Limits for Both Employees and Employers

Posted by seolinkvine on 28 October 2010

You need to know your 401K contribution limits for retirement planning as part of a do it yourself financial plan . The 401K contribution limits for 2010 are $16,500 for employees. 401K employer contribution limits are  6% of the employee’s pre-tax compensation under the 401k rules. You can contribute an addition $5,500 for a total of $22,000 if you are 50 and older .

For example, if you earned $100,000, you could contribute a maximum of $16,500 in 2010 before taxes and your employer could contribute up to another $6,000 for a total of $22,500 going into your 401K account. Those are the 401K limits for people under 50.

  You could contribute the maximum of $16,500 plus an additional $5,500 bringing the total of $22,000 contributed on a pre-tax basis according to the 401k rules if you are over the age of 50 . If your employer also contributed the maximum of $6,000, you could have a total of $28,000 put into your account in one year. For people over the age of 50, those are the 401K limits .

401K contribution limits did not change from last year due to no inflation . The 401K limits are high enough to make the maximum contributions that will help make up for any losses you had in the prior year. Use the 401K rules above to make the maximum 401K contributions in this year. Rebuild your retirement dreams by putting in the maximum 401K contributions allowed by law and what you are eligible for through your employer.

Many employers will match contributions by employees up to a certain percentage. That is a 100% return on your money contributed yet statistics show most of you don’t take advantage of this. You can’t afford not to. You will not get that kind of return of your money elsewhere, and it is risk free.

Other advantages of your maximum 401K contributions are tax deferral on your  contributions and the tax deferred growth on the earnings within the 401K account . By putting money into your 401K on a pre-tax basis, you have more money working for you right away. By having to pay no tax on the investment income within your 401K plan, you get your money to grow faster than an investment outside of this plan.These two advantages make it the ideal growth vehicle for retirement planning.  There are three investments of which the 401K is one, that you will give you the most income at retirement- social security, savings, and 401K plan income  . -Fern Alix LaRocca CFP® Wealth Coach

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