MF Global

About Trading CFDs

What is a CFD?

Easy to go long or short

Full exposure, no physical purchase

Put up only a fraction of the full contract value

No fixed time period

Immediate dealing

Since their introduction into Australia in 2002, CFDs have become one of the fastest growing financial products to enter the Australian market place. The popularity of CFDs amongst both investors and traders is most likely due to their flexibility and simplicity when compared to other equity derivatives.

Buying and selling the performance of a security using direct market access (DMA) CFDs is similar to buying the actual underlying instrument using a loan. You could borrow $10,000 from a bank to buy shares. You would receive the returns from the shares, but you would pay interest on the loan to the bank. CFDs combine this process in one single and simple transaction.

For example, if you want to buy $10,000 worth of Australian DMA CFDs you will have to deposit an initial margin of $1,000. You will then be allowed to purchase $10,000 worth of Australian DMA CFDs (based on a 10% initial margin percentage). The full $10,000 value of your CFD position will be subject to the underlying securities price performance. If you want to keep the CFD position overnight you must pay a funding charge on the total nominal value of the position. Interest is calculated at a spread over or under the MFGA Base Rate (MBR). The MBR tracks, but does not necessarily mirror, the Reserve Bank of Australia Interbank Overnight Cash Rate (RBAIOCR). If a CFD position is not carried overnight you will pay no funding charge, that is if you open and close a position on the same day in the same CFD you are not charged any funding.

Commission is charged on each CFD transaction entered into with MF Global and is calculated as a percentage of the trade value of the underlying shares bought or sold. The commission rate for each CFD trade starts from as low as 0.10%* of the total trade value. All trades of less than A$10,000 in face value incur a minimum commission.

As with the underlying securities, CFDs allow you to benefit from normal market price movements. Your open positions are valued every night at the close of business prices. Profits or losses are credited / debited to your account each day. Adjustments relating to corporate actions, such as dividends, bonus issues and reconstructions in respect of the underlying securities are also applied to your account should they occur. CFDs however, do not entitle the holder to any voting rights or franking credits in connection with the underlying shares.

Trading Example

Opening your CFD position

Telstra is trading at (bid/offer) $4.99/$5.00. You want to buy $10,000 (2,000 CFDs) worth of Telstra CFDs at the offer price of $5.00 with the view that the share price of Telstra will rise.

CFDs - Leveraged trade		Traditional Trade with no Leverage
Buy Price	$5	Buy Price	$5
Buy Quantity	2,000	Buy Quantity	2,000
Margin required (5%)	$500	Initial Outlay	$10,000
Commission charge (to buy)	$12.50	Commission charge (to buy)	$25
Total Outlay	$512.50	Total Outlay	$10,025

A traditional trade with no leverage requires an initial outlay of 100% of the price of 2,000 Telstra shares at $5.00 ($10,000). Because CFDs are a leveraged product, you will typically only need from 5% of the value of 2,000 Telstra Share CFDs ($500) to open the same CFD position.

The amount of commission charged is significantly lower when trading CFDs through MF Global. You will pay a minimum commission of $10* per CFD trade compared with approximately $25 per trade with a traditional equity broker who gives you no leverage.

The total outlay of this CFD transaction through MF Global is $510 which is $9,515 less than a traditional trade (total outlay of $10,025) for the same exposure in the market.

Closing your CFD position

Telstra price rises to $5.20. Having held the position overnight, you decide to close your position by entering an equal but opposite trade, by selling 2,000 Telstra CFDs at $5.20.

CFDs - Leveraged trade		Traditional Trade with no leverage
Sell Price	$5.20	Sell Price	$5.20
Sell Quantity	2,000	Sell Quantity	2,000
Gross profit/loss	$400	Gross profit/loss	$400
Total Commission charges (to buy and sell)	$25	Total Commission charges (to buy and sell)	$50
Overnight funding: 1 day^	$2.81	Overnight funding: 1 day	Zero
GST	Zero	GST (10%)	$5
Net profit/loss	$372.19	Net profit/loss	$345
Return On Investment (ROI)	73%	Return On Investment (ROI)	3%

^ Based on a MF Global Base Rate of 10.25% (2,000 x $5.00 x 10.25% / 365). Subject to change.

By closing your position you realise a gross profit of $400. The net profit received from the CFD trade and a traditional broker trade is calculated by subtracting commission charges and GST from gross profit. The CFD net profit also takes into account any funding or interest charged on the CFD position.

Your net profit received from the CFD trade is $372.19. Alternatively, with a traditional trade your net profit would be $345 due to substantially higher commission on your trade. Additionally, with physical shares you will be subject to GST on commissions. CFD commissions are not subject to GST.

Return on Investment

CFDs are a leveraged product so your return on investment (ROI) from this trade is 73%, which is significantly more than your ROI from a traditional trade with no leverage - which is only 3%.

Important note: If the price had moved in the opposite direction by 20 cents you would realise a gross loss of $400 trading either CFDs or through a traditional share trade. Gross loss does not include commissions, funding or GST issues and that the percentage of ROI loss compared to the initial investment would also be significantly greater than the ROE from a traditional trade with no leverage. When trading derivatives it is entirely possible for traders to make losses that exceed the value of their initial investment.

*Frequent Traders Club. Conditions Apply.


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