Wednesday January 4, 2012 19:11
Why Trade CFDs On Mining Shares?
Posted by Pro Trader as Day Trading
Nearly all CFD brokers in Australia offer CFDs over the shares making up the ASX top 300, the rationale behind this is simple, shares with a larger market capitalisation tend to be much more liquid. Several CFD companies forget that we live in Australia, a country rich in resources and of course also rich in resource stocks. A large amount of stocks listed on the ASX are resource based, this is in actual fact the largest sector of the Australian stock market.
Trading CFDs over junior mining shares can be extremely rewarding if you select your shares wisely. When buying and selling CFDs over speculative stocks you should always do a little analysis on the company. Prior to selecting your shares you must make certain that the company has first-class management and a quality project. Of course if the copper price has risen and you happen to be in search of exposure to shares in this sector logically you wouldn’t choose a CFD over a stock with gold assets, this is why deciding on shares within the relevant sector is also essential. It’s always important to remember buying and selling CFDs over speculative stocks also has risks as these kinds of shares can go up in price as quick as they can come down.
So why a trade CFD as opposed to buying the Share outright?
The answer to this question is straightforward and can be summed up in a couple of words, unrealised profits and losses. Unlike stocks CFDs are marked to market each day meaning that the profits or losses are credited or deducted to and from your account each trading day. The profits and losses from buying and selling shares are treated very differently in that they’re only realised once the stock is sold. Realising profits and losses each day means that you are able to use your unrealised to profits to buy new positions without needing to deposit added funds into your account, of course the same goes for losses in that you’ll have to deposit money into your account if the trade moves against you.
It is vital that you note the majority of speculative stocks will have a larger margin obligation than shares in the ASX top 300, their margin requirement could be as high as 100% allthough the bulk are obtainable on a margin of 75%. One vital factor to consider here is whether or not your CFD provider will charge you financing on the full notional worth of the position, this would of course be fairly high if the position was on a 100% margin, there are on the other hand some CFD providers that will only charge financing on the borrowed amount. It would be far more economical to select a CFD company which will only charge you on the borrowed amount, if the CFD is on 100% margin this would deliver a large cost saving.
You’ll find very few CFD brokers in Australia that will allow you to buy and sell CFDs on all ASX listed stocks, certainly one of the most common CFD brokers is IC Markets. One of the key advanatages of buying and selling with IC Markets is that they do not have any CFDs on 100% leverage and only charge financing on the borrowed amount meaning that you will not pay any financing costs for CFDs bought on 100% margin.