How Gearing Works With CFDs Versus Spread Trading

How Gearing Works With CFDs Versus Spread Trading This is the most important concept you’ll need to understand to accelerate your account. During your trading experience, with gearing, you’ll learn how to multiply your profits. But you can also multiply your losses, if you don’t know what you’re doing. So listen up. What Gearing is in a nutshell… Gearing also known as leverage or margin trading, is the function that allows you to pay a small amount of money, in order to gain control and be exposed to a larger sum of money. There is a very simple calculation you’ll use calculate the gearing for both CFDs and Spread Trading.    Exposure Initial margin In order to understand this formula, let’s use three gearing examples with shares versus CFDs and Spread Trading. We’ll break it up into three steps for CFDs and Spread Trading: 1.    Calculate the entry market exposure 2.    Calculate the initial margin (Deposit) 3.    Calculate the gearing We’ll also exclude costs to help simplify the gearing concept better.  EXAMPLE 1:  Buying AAS Ltd shares Portfolio value: R100,000 Company: AAS Ltd Share price: R109.00 No. shares to buy: 100 If you buy one share at R109 per share, you’ll be exposed to R109 worth of one share. If you buy 100 shares at R109 per share, you’ll be exposed to R10,900 worth of shares (100 shares X R109 per share). We know that to be exposed to the full R10,900 worth of shares, we needed to pay an initial margin (deposit) of R10,900. If we plug in values into the gearing formula, we get. Gearing = (Exposure ÷ Initial Margin)               = (R10,900 ÷ R10,900)               = 1:1 This means, there is NO gearing or a gearing of 1 times, with the share example as, what we paid is exactly as what we are exposed to. Easy enough? Let’s move onto CFDs.  EXAMPLE 2:  Buying AAS Ltd CFDs Portfolio value: R100,000 CFD of the underlying Company: AAS Ltd CFD Share price: R109.00 Margin % per CFD: 10% (NOTE: Find out on your trading platform or ask your broker for the margin % per CFD) No. CFDs to buy: 100 Step #1:  Calculate the entry exposure of the CFD  Entry exposure = (Share price X No. CFDs)                           = (R109.00 X 100 CFDs)                           = R10,900 NOTE: 1 CFD per trade, you’ll be exposed to the value of one share.             100 CFDs per trade, you’ll be exposed to the value of 100 shares. Step #2:  Calculate the initial margin of the CFD trade Initial margin = (Exposure X Margin % per CFD)                      = (R10,900 X 0.10)                      = R1,090 This means to buy 100 CFDs, you’ll need to pay an initial margin (deposit) of R1,090.

Step #3:  Calculate the gearing of the CFD trade Gearing = (Exposure ÷ Initial margin)               = (R10,900 ÷ R1,090)               = 10 times With a gearing of 10 times, this means two things... #1: For every one CFD you buy for R10.90 per CFD, you’ll be exposed to 10 times more or the value of one AAS Ltd  share. #2: For every one cent the share price rises or falls, you’ll gain or lose 10 cents. EXAMPLE 3:  Buying AAS Ltd through Spread Trading Portfolio value: R100,000 Underlying Company: AAS Ltd Share price: 10,900c Value per point: 100c (R1.00) Margin % per Spread Trading contract: 7.50% (NOTE: Find out on your trading platform or ask your broker for the margin % per share contract) Step #1: Calculate the entry exposure of the spread trade Entry exposure = (Share price X Value per point)                          = (10,900c X 100c)                          = 1,090,000 (R10,900) Note: 1c value per point per spread trade– you’ll be exposed to one AAS share           100c value per point per spread trade – you’ll be exposed to 100 AAS shares Step #2: Calculate the initial margin of the spread trade Initial margin = (Exposure X Initial margin)                       = (1,090,000c X 0.075)                       = 81,750c (R817.50) This means, you’ll need to pay an initial margin (deposit) of R817.50 to be exposed to R10,900 worth of AAS Ltd shares.  Step #3:  Calculate the gearing of the spread trade Gearing = (Exposure ÷ Initial margin)               = (1,090,000 ÷ 81,750c)               = 13.33 times  This means, by depositing R817.50 you’ll be exposed to 13.33 times more or R10,900 (R817.50 X 13.33 times) worth of AAS Ltd shares. You now know how gearing works with CFDs and Spread Trading, in the next lesson we’ll cover how to never risk more than 2% of your portfolio for each CFD and Spread Trade you take. Please make sure, you’re up to date with the previous derivatives articles as you’ll need them for the next lesson. Click on the links below now to catch up… READ NOW: What are derivatives & why are they a revolution?  READ NOW: Spread Trading & CFDs For Dummies WATCH NOW: How to relate gearing to buying a house (Go to 8:00minutes to watch) Do you have any questions on CFDs or Spread Trading? Ask by clicking here, and I’ll answer them in the next MATI Trader Q&A.  Timon Rossolimos Founder, MATI Trader

Spread Trading And CFDs For Dummies

Let’s keep it simple… Throughout your MATI Trader experience, we’ll stick to the two most popular and profitable ways to trade using… CFDs and Spread Trading… In the previous article we tackled what derivatives are and why they’re a revolution to traders.  In this issue, we’ll discuss the differences between both CFDs and Spread Trading…  What are CFDs and Spread Trading? Spread Trading (betting) and CFDs are financial instruments that allow us to do one thing. To place a bet on whether a market will go up or down in price – without owning the underlying asset. If we are correct, we stand a chance to make magnified profits and vice versa if wrong. Both CFDs and Spread Trading, allow us to buy or sell a huge variety of markets including: •    Stocks •    Currencies •    Commodities •    Crypto-currencies and •    Indices.  When you have chosen a market to trade, there are two types of CFD or Spread Trading positions you can take. 1.    You can buy (go long) a market at a lower price as you expect the price to go up where you’ll sell your position at a higher price for a profit. 2.    You can sell (go short) a market at a higher price as you expect the price to go down where you’ll buy your position at a lower price for a profit.  EXPLAINED: CFDs for Dummies DEFINITION: A CFD is an unlisted over-the-counter financial derivative contract between two parties to exchange the price difference between the opening and closing price of the underlying asset. Let’s break that down into an easy-to-understand definition. EASIER DEFINITION: A CFD (Contract For Difference) is an: •    Unlisted (You don’t trade through an exchange) •    Over The Counter (Via a private dealer or market maker) •    Financial derivative contract (Value from the underlying market) •    Between two parties (The buyer and seller) to •    Exchange the •    Price difference (Of the opening and closing price) of the •    Underlying asset (Instrument the CFD price is based on) EASIEST DEFINITION Essentially, you’ll enter into a CONTRACT at one price, close it at another price FOR a profit or a loss depending on the price DIFFERENCE (between your entry and exit). Moving onto Spread Trading. EXPLAINED: Spread Trading for Dummies  DEFINITION: Spread Trading is a derivative method to place a trade with a chosen bet size per point on the movement of a market’s price. EASIER DEFINITION: Spread Trading is a: Derivative method (Exposed to an underlying asset) to Place a trade (Buy or sell) with a chosen Bet size per point on where you expect a   Market price will Move (Up or down) In value EASIEST DEFINITION: Spread Betting allows you to place a BET size on where you expect a market to move in price. Each point the market moves against or for you, you’ll win or lose money based on their chosen TRADING bet size (a.k.a Risk per point or cent movement). The higher the bet size (value per point), the higher your risk and reward. The costs you WILL pay with Spread Trading and CFDs Both Spread Trading and CFDs are geared-based derivative financial instruments. As their values derive from an underlying asset, when you trade using Spread Trading or CFDs, you never actually own any of the assets. You’re just making a simple bet on whether you expect a market price to rise or fall in the future. If you decide to go with the broker or market maker who offers CFDs or Spread Trading, there are certain costs you’ll need to pay. Costs with Spread Trading With Spread Trading, you’ll only have one cost to pay – which are all included in – the spread. The spread is the price difference between the bid (buying price) and the offer (selling price). EXAMPLE: Let’s say you enter a trade and the bid and offer prices is 5,550c – 5,610c. The spread, in this case, is 60c (5,610c – 5,550c). This means your trade has to move 60c to cross the spread in order for you to be in the money-making territory. Also, if the trade goes against you, the spread will also add to your losses. Why the spread you ask? The spread is where the brokers (market makers’) make their money. Costs with CFDs Brokerage With CFDs, it can be different. Depending on who you choose to trade CFDs with, you may need to cover both the spread as well as the brokerage fees – when you trade. These brokerage fees can range from 0.2% - 0.60% for when you enter (leg in) and exit (leg out) a trade. NOTE: If the minimum brokerage per trade is R100, you’ll have to pay R100 to enter your trade. Daily Interest Finance Charge The other (negligible) cost, you’ll need to cover is the daily financing charges. If you buy (go long) a trade, you’ll have to pay this negligible charge (0.02% per day) to hold a trade overnight. However, if you sell (go short) a CFD trade, you’ll then receive this negligible amount (0.009%) to hold a short trade overnight. The costs you WON’T pay as a Spread Trader With spread trading (betting), you don’t own anything physical. When you take a spread bet, you’re simply making a financial bet on where you expect the price to move and nothing else. This means, there will be no costs to pay as you would with shares including: NO Daily Interest Finance charges NO Stamp Duty costs NO Capital Gains Tax NO Securities Transfer Tax NO Strate NO VAT NO Brokerage (all wrapped in the spread). The costs you WON’T pay as a CFD trader With CFDs, you’ll notice that there are similar costs with Spread Trading that you won’t have to pay including: NO Stamp Duty costs NO Securities Transfer Tax NO Settlement and clearing fees NO VAT NO Strate

24-Hour Dealings The great thing about Spread Betting or CFD trading is that, you can trade markets trade 24/5. I’m talking about currencies, commodities and indices. And with Crypto-currencies you can trade them 24 hours a day seven days a week. I have left out a very important difference between CFDs and Spread Trading… Gearing and how it works in real life… Either you can wait till next week, as I will explain exactly how much money you can make or lose through the art of gearing or you can click here where I explain how it works through a FREE video…