Understanding the dividend process will help you to understand what happens if a stock goes ex dividend while you are holding it with a CFD.

When trading stock, there are three important dates in relation to dividends; the ex dividend date, the record date and the payment date. When you are trading CFDs, the only date that is important is the ex dividend date.

Trading Stocks For Dividends

Buying the stock before the ex dividend date will entitle you to receive the dividend. Buying the stock on the ex dividend date you will not receive the dividend.

The next date is the record date which is 3 trading days (on the ASX) after the ex dividend date. This is the date the investor must own the stock on to receive the dividend. Because it takes 3 days to settle a share that is purchased the ex dividend date and the record date are three days apart.

The final date is the payment date on which the dividend cheque is actually posted to the investor. There can be a significant delay from the record date to the payment date.

CFDs - Its All About The Ex Dividend Date

When you are trading Contracts for Difference (CFDs) the only date of any importance is the ex dividend date as all three dates that apply to stock investors blend into one.

If you have bought the Contract for Difference (CFD) then on the ex dividend date you receive a cash payment equivalent to the amount of the dividend.

When you are short selling CFDs you will have a payment taken out of your account on the ex dividend date that is equal to the amount of the dividend. These payments or deposits will be processed from your cash account by the CFD broker.

Zero Risk, Is That Possible

It may then seem that by buying a Contract for Difference (CFD) one day before the ex dividend date and selling it after the ex dividend date you have found a no risk trading opportunity as you are guaranteed to receive the dividend.

There is a problem with this strategy and that is the stock normally drops the amount of the dividend on the day it goes ex dividend, which would wipe out any gain made from the dividend payment.

Likewise it does not work to sell a Contract for Difference (CFD) before the ex dividend date, the drop in value on the ex dividend day will be offset by having cash removed from your account for the amount of the dividend.

Franking credits cannot be used if you are trading Contracts for Difference (CFDs) for dividends. Using CFDs eliminates some of the tax advantage of investing for dividends.

The Ex Dividend Date and CFDs

On the ex dividend date you would expect the stock to drop equal to the dividend payment. If you own a CFD you will get the dividend payment in cash. If you have sold a CFD and are short you will pay out the dividend amount in cash.

Interestingly, most CFDs do not trade on a Contracts for Difference market. The Australian Stock Exchange has created a market for CFDs but as at the end of 2008 the volume traded on the ASX CFD market represented only 1% of the total CFDs traded.

CFDs Traded Over The Counter

CFDs trade Over The Counter (OTC) which means that they are an agreement between you and the CFD provider. There is no formal CFD exchange, so to exit the position you must close the position with the same broker you entered the contract with. It is not possible to close the CFD with a different broker.

The prices that you can trade a CFD at are usually the same as the underlying market as the CFD brokers mirror the underlying market with their quotes.

Protecting The Position With A Hedge

While no formal Contracts for Difference market exists, other than the ASX CFD market, the CFD broker may, or may not trade the underlying instrument on the underlying market to protect the position they have taken with the individual trader. This is known as hedging a position.

If a trader was to buy 300 shares of BHP, the CFD broker could simultaneously buy 300 shares of BHP on the ASX market. By doing this any gain or loss made by the trader on the CFD position equals the gain or loss made by the CFD broker. The broker is said to be fully hedged.

If you choose to use Direct Market Access then the CFD provider fully hedges every position. If you are using the Market maker execution model then the CFD provider does not necessarily enter every trade and may instead hedge the total position.

No Guarantees With CFDs

The strength of your CFD broker is an important consideration as you must enter and exit your CFD trades with the same broker. When it comes time to take a nice profit you want to be sure your CFD broker is there to deliver it.

Most CFD brokers are large companies that are publicly traded so information on their financial strength is readily available. However not all companies are public and finding out the financial strength of those that are not may be more difficult.

CFD Market

The absence of a CFD market does not really affect traders at all. By placing orders with your CFD broker you are likely to trade at market prices and the order could even be executed in the physical market.

New traders may say that CFDs suck, but blaming CFDs for the fact you lost money is a very natural thing to do.

Losing money is not due to the use of CFDs (Contracts for Difference) it is the decisions that the trader made. It is very important as a trader that you take responsibility for your actions, both win and lose.

Leverage Is A Double Edged Sword

CFDs trade on leverage where a small amount of money down gives you access to a large position. This can result in very quick gains or losses as the market moves. If you lose money trading CFDs do not blame CFDs and say that CFDs suck.

Using stops on every trade is an important part of your risk management. If you do not use stops then you may not be ready to become a CFD trader.

The Broker Knows Where Your Stop Is

When trading CFDs the broker knows where your stop order is placed and some people believe CFDs suck because the broker can then target your stop. Once you are exited from the trade you then watch the market move the way you expected it to go in the first place. You lost money despite the fact that you were correct.

The brokers trade millions of dollars each day and it is not in their best interests to chase after traders stops. The more money you make the more you are likely to trade. I have had stops hit and then watched the market reverse and I have also seen the market very close to my stop loss before reversing. Good stop placement will minimise the number of false stop loss triggers.

All the traders in the market create the price movement and you are giving a CFD broker too much credit if you think they can move the market. Accept that you will be stopped out at times even if you have placed your stop correctly.

Ripped Off By Re-quotes

Many new traders trading shares also reckon that CFDs suck because their market maker broker re-quotes them a higher entry price when buying the CFDs. These re-quotes are delivered because there is insufficient volume at the level that the trader wishes to trade, or the market has moved rapidly from the current price.

The difference between the re-quote and the price you placed your order at is called slippage. This is accepted when buying stock as you may execute some of your order at one price and some at a higher price where there is sufficient volume. Your average price is then higher than your original order.

A market maker executes the whole order or nothing at all. They do not provide partial fills instead the broker provides a re-quote at a level that they can execute the complete order. Re-quotes are necessary for the orders to be executed in line with the underlying market and are not designed to rip traders off.

It Is Up To You

It is never the trading instrument that is the cause of bad performance it ultimately is the trader. There is no point in blaming the market, the broker, your partner or CFDs it comes down to your decisions.

If you never take responsibility for your results, you cannot change things. If you think the rest of the world is driving you crazy, you will have to send the rest of the world to a psychiatrist for you to get better. As a trader take full responsibility for the outcome of your trades, you can then change the outcome.

CFD finance is easy to understand if you can grasp the mechanics of trading Contracts for Difference. To enter a CFD position you must pay a small margin. The margin that you pay is insurance for the CFD provider against any loss you may make. The value of the margin varies each day as the value of the position changes. The margin money does not buy the underlying stock.

The CFD Broker then protects the position they hold by purchasing the underlying instrument and the cost of this is the full value of the position. The CFD broker is effectively lending you the money to buy the underlying instrument.

CFD Finance when Buying CFDs

The CFD provider will charge interest on the whole position that you enter. Interest is charged on the face value of the contract if you buy a CFD. The face value is the number of contracts multiplied by the current price.

So if you buy 1000 CFD contracts of BHP at $33.00, then you will be required to pay interest on $33,000. This is how CFD finance works when trading long.

CFD Finance When Selling CFDs

When you short sell a CFD you get paid straight away for the position you sold. You do not see the money directly in your bank account, but the CFD broker does receive the cash if they sell the underlying instrument.

Selling 1000 CAT at $41 using Contracts for Difference would return you $41,000 on which you will get interest while the position continues to be held.

How Much Will CFD Finance Cost?

Interest rates vary from provider to provider but are usually based on the following formula. A reference rate of interest plus a margin of 2 - 3% for long positions and a reference rate of interest less a margin of 2 - 3% when trading short. The reference rates used are typically the Reserve Bank of Australia (RBA) rate or the London Interbank Offered Rate (LIBOR).

The CFD broker then makes money via the interest rate margin that they charge on every position. In effect CFDs are just a fancy way for CFD brokers to lend money to their clients.

When Is CFD Finance Charged

CFD finance is not calculated on positions that are entered and exited on the same day. Interest is only charged if a position is held overnight. So intraday positions are excluded from CFD finance.

The rate of interest is very low relative to the impact of movement in a CFD position. With current interest rates at about 6% per annum fluctuations in the CFD position can easily be more than this in a day.

The two critical numbers to know when you are trading is the risk reward ratio and the winning percentage or hit rate. Understanding these numbers will go a long way to improving your trading.

The risk reward can be calculated by averaging all the wins and dividing by an average of all the losses. The risk reward clearly displays how large your profits are when compared to your losses. The hit rate is simply how often you win and is a count of the winning trades divided by a count of all the trades.

Lotto versus CFDs

Most people have bought lotto tickets at some point in their life, however is lotto the way to riches?

The attraction of lotto is the low outlay or risk. If you lose it only costs you $10 and if you win the returns are potentially enormous, maybe $10 million. The risk reward of Lotto is 1 million:1. This is an excellent risk reward ratio and one you are very unlikely to find anywhere else.

However if it was that easy we would have all won lotto. This is not the case and while the risk reward is exceptional, the hit rate is lousy. Assuming that the lotto draw requires 6 balls out of 40 to win then the chance of buying the winning ticket are 3,838,380:1.

If we were to play Lotto 3,838,380 times then we would expect to win once and lose 3,838,379 times. This means we would win $10 million once and lose $38,383,790, overall losing $28,383,790.

Winning Lotto is more about luck than probability as you may win before you buy you 3,838,380 ticket. But when it comes to building a profitable trading strategy it is not about luck it is about taking advantage of an opportunity that has a profitable edge.

Can Betting On Rugby Improve Your Trading?

The Crusaders have dominated the Super 14 rugby series in New Zealand in the last 10 years as they won 7 years out of the last ten.

In 2008 a gambler placed a $100,000 bet on the Crusaders to win a game at odds of just 1.08. This means that if the Crusaders won the gambler would have received a payout of $108,000, making a profit of just $8,000, but if they lost the gambler would lose $100,000. This is a lousy edge ratio with the risk reward ratio of 8 to 100 and a potential big loss for a very small gain.

Despite the lousy risk reward the probability of success is very high. If the probability was greater than 90% that the Crusaders would win then this could be the basis of a profitable strategy.

Calculating the probability of a team winning a game is not an easy task, but assuming the odds were 95%, then the gambler would win 19 times $8,000 and lose $100,000 just once. It could be that our gambler had a profitable strategy despite the lousy risk reward.

Successful trading is about following a profitable strategy and by using a combination of the hit rate and the risk reward you can ensure the strategy provides you with an edge.

There are a wide variety of brokers available and the following points are important to consider when choosing a CFD Broker.

Three Different CFD Models

There are three ways you can trade CFDs:

- Market Maker

- Direct Market Access (DMA)

- ASX CFDs

Market maker orders are executed directly with the CFD Broker and the CFD Broker may, or may not, buy the underlying instrument as protection for the position.

Direct Market Access (DMA) orders are placed directly into the underlying instrument by the CFD Broker and when it trades in the physical market your order is executed.

ASX CFDs are traded more like stocks with orders placed into a central auction facility run by the Australian Stock Exchange. Buyers and sellers are matched up by the ASX for the trades to be executed.

What Do You Want To Trade?

The easiest way to choose between these three execution models is to determine what you are likely to trade. To trade overseas shares, indices or currencies, you will have to choose a market maker model or a limited selection is available through the ASX CFDs.

If ASX stocks are you trading instrument of choice then you can use all of these methods to execute your trades. DMA (Direct Market Access) is available on ASX stocks only.

Step 2 for Choosing a CFD Broker

The choice now comes down to whether you wish to use guaranteed stops and once again pushes towards the choice of a market maker platform, although Macquarie does offer guaranteed stops on a DMA model.

To trade during the auctions at open and close you will have to use either DMA execution or ASX CFDs. The market maker model does not allow you to participate in the opening and closing auctions.

If you want complete transparency, where orders that you place are visible in market depth you will opt for the ASX CFDs or DMA execution.

Which Platform Do I Use?

Whichever CFD broker you use there are a wide variety of trading platforms available. Trading platforms typically include quotes, charts, and news feeds. All your CFD trades can be executed through these platforms with a variety of different types of orders.

Test drive the platforms using the free trials that the CFD brokers offer to find one that suits you. The trading platform will often make the decision for you on which is the best CFD broker.

Decide what it is that you want to trade and how you want to do that, to help you select the CFD broker that will work best for you.

The Australian Stock Exchange (ASX) has recently listed ASX CFDs for stocks, indices, currencies and commodities. The ASX CFDs are identical to the CFDs issued by other CFD providers in the market, but there are a few differences in the way they trade.

How to Trade ASX CFDs

To trade ASX CFDs you have to open an account with a broker that has been approved to trade ASX CFDs. CFDs are then traded like shares with orders placed into a central order book and executed on a price and time basis. The first order placed at a set price is always traded first.

Because the ASX provides a central market place and standardises the CFD contracts it is possible to buy an ASX CFD through one broker and sell it through another broker. This is not possible when you use other CFD providers as all positions opened with the CFD provider must be closed with the same CFD provider.

ASX Guarantees Their CFDs

The ASX stands behind their CFDs with their guarantee fund which can be called on if a broker was to default. Other than the requirement of ASIC to segregate client money from that of the CFD provider, there is no guarantee in the event that a CFD provider was to default.

The ASX CFDs offer a unique feature which allows a trader to swap the CFD position for a physical position in the underlying stock. This can be achieved at the exact same price and is conducted by the broker as an off market transfer. This is not available if you are trading with other CFD providers.

Disadvantages of ASX CFDs

ASX CFDs suffer from a lack of liquidity as they rely on other traders to take the other side of the trade. When trading with OTC (over the counter) CFD providers the CFD provider always takes the other side. Liquidity is equivalent to the underlying instrument in the OTC CFD market.

The other mechanics of ASX CFDs are very similar to Contracts for Difference (CFDs) issued by other CFD providers.

CFDs have taken the trading world by storm. Now take advantage of this revolution and learn CFDs yourself. CFDs offer the trader access to leverage to super size your returns. A deposit of just 1% will allow you to trade at leverage of up to 100 times. An investment of just $100 allows you to trade up to $10,000 of a currency, commodity, index or stock.

Amplify Your Results with Contracts for Difference (CFDs)

This means a small profit is magnified many times over when trading CFDs. Consider buying 1000 BHP Billiton at $29.00. Traditionally a trader would have to spend $29,000 to do this and if they were able to sell BHP at $32.00 the trader makes a gain of $3,000 or 10.3%.

When you learn CFDs you can buy 1000 contracts of the stock for a 5% margin or just $1,450 down. If you were able to sell your stock at $32.00 you still make a gain of $3,000 but your return has skyrocketed to 206%. Now you can see the power involved if you were to learn CFDs.

Learn to Manage Your Risk with CFDs

But not every trade goes as planned and it is important to learn how to manage your risk when trading CFDs. The market is a good teacher and you will learn this one way or another. When you learn CFDs you will know how important it is to understand and know the risks before you start trading.

Profit When the Markets Fall with Contracts for Difference (CFDs)

The opportunity to learn CFDs opens a door to making money when markets fall. CFDs can be used to profit on the way down as well as the way up. You do not have to sit on the sidelines waiting for a reversal as it is very easy to short sell with Contracts for Difference (CFDs). And trading CFDs short is easy when compared to options or warrants.

Choose When You Want To Trade

CFDs are available for a wide variety of markets from commodities to indices, stocks to currencies. With such a wide selection of markets there is something to trade 24 hours per day. So pick a market to trade that works in with your schedule.

Start trading CFDs today and learn CFDs.

There are certain silly mistakes that all traders have made at some point in their trading careers, even though there are simple techniques that can be used to avoid them.

Buy or Sell, Which Button Was That

It is not unusual for a trader to push the wrong button when entering or exiting from a trade. It is most common to push sell to get out of a short position, when you really meant to buy. Sometimes it just gets so confusing, so instead of being out you end up with double the quantity.

This mistake is easily caught by checking in with your open positions after you place a trade to ensure that the trade you have placed did what you expected. If caught immediately this mistake is easily rectified and is likely to only cost a small sum for a stupid mistake. If you do not realise your mistake and the position is left open this can have disastrous consequences for your account.

Forgotten Stops

If you exit an order when you are watching the screen, make sure you remember your stop orders. Assuming you have placed a stop on the trade, which you always should, then you must cancel the order if you exit before the stop is triggered. Forgetting your stops is a risky exercise and if the stop is triggered it could be hours before you know that the order was traded. The market may move in your favour, but it is not something I would like to gamble on.

Before exiting the trading platform at the end of a trading session make sure you check your open positions match your stop loss orders to avoid any surprises when you next enter your trading platform.

Was That $10000 or $100000

Assuming the trader has the discipline to calculate their position size in the first place, sometimes it is possible to get it wrong. The most common error here is not usually bad maths, it is incorrectly entering the number of zeros. Too many zeros and your risk increases 10 times, too few and your profits evaporate.

When you look at the open positions after you place an order you should be easily able to verify that the order you placed was the correct size.

Avoid Placing Your Stops Too Tight

If a stop is placed too close to the current price, it is very likely that the stop loss will be triggered by normal price movement. While the trader that places a tight stop is attempting to avoid losing money, this is often the end result of their actions.

Stops must be placed far enough away from the price action to exit you from a position if your trade view turns out to be wrong. Give the underlying share room to move to avoid getting caught by this CFD mistake.

Follow The Rules

Even experienced traders can be caught out by chasing a share as it moves rapidly. While it is more common amongst people new to trading it still can catch out the more experienced traders. Following this strategy is usually a recipe for disaster and also can be one of the hardest mistakes to overcome.

There are a huge range of opportunities that you can trade, more than you would have capital to follow and there are always other trades waiting around the corner. Ensure you follow your strategy and stick to your trading plan. This can help you avoid chasing trades which can be an expensive exercise.

While no trader will be right every time, these silly mistakes can be easily avoided or caught before they have any real impact on your account.

The leverage that is available when trading CFDs is one of the most important CFD risks to manage. With a small amount of money you can control a very large position and profits or losses can occur rapidly.

Stops Are Essential

Stops work very well to limit your CFD risk. Place your stop at a price that will control the loss per contract to an acceptable level. This is an effective way to manage your risk.

With an entry at $34.50 and a stop placed at $34.20 your loss is limited to 30 cents per contract. If the trade goes wrong it will hit your stop loss and exit you from the trade preventing a larger loss that could occur.

Control Your Size, Control Your Loss

By placing your stop at a predetermined level the amount you lose will now depend on your position size. The more contracts that you hold the more money you will lose if the trade goes wrong. This is the second CFD risk that you can manage.

with 30 cents at risk the number of contracts will determine your gain or loss. 100 contracts would give a loss of $30, 200 contracts would lose $60 and 1000 contracts would lose $300. Bigger positions, say 10,000 contracts would lose $3,000. Correct position sizing is an important aspect of controlling CFD risk.

Beware of Gaps

Even though you have placed a stop in the market you can still get caught out by a gap. When a gap occurs the share price jumps beyond the stop loss and even though you were expecting a loss of 40 cents the loss becomes 70 cents. If the stock closed at $34.50 and opened the next morning at $33.80 the stop at $34.10 cannot be executed because the share never traded at the price. It is possible to minimise the effect of gaps using some of these techniques.

Adjust the number of contracts

Use a guaranteed stop loss (gets you out at the stop price guaranteed!)

Trade indices or currencies as they hardly ever gap

Biggest CFD Risk

The biggest risk when trading CFDs is however not related to stops or position sizing, it is instead you. Controlling your own emotions is vitally important to prevent placing a position that is too big or to move stops to prevent you losing money. If you follow either of these strategies you will inevitably lose.

Profitable trading with CFDs is a result of effectively managing your risk.