Don't use CFDs (this video can help you save money)

The topic today is cfd. That means contract for difference. And the reason why I want to do this video is because many people are confused at the beginning about should I buy stocks directly or should I buy with CFDs? Especially because CFDs are really publicized and the brokers are encouraging people to use them. So today we will review three reasons why I don't suggest you to trade cfd. And I also want to show you with Interactive Broker. That is what you see here and we will see soon the platform here. With an example I will show you what is the difference between using CFDs and the normal account. But before that, what is a cfd? Well, a CFD is a derivative that is basically a product whose price is derived from the price of something else. So let's say that you can buy Apple on the stock exchange. Now you can buy the Apple shares or you can buy an Apple cft. What is the difference? Well, the way it works in terms of the price you pay and the functioning. So you buy and you sell and you get the difference or you lose. The difference is the same as stock. The main difference is that when you are buying stocks, you are buying them on the stock exchange and then you are basically holding shares of Apple, for example. But when you buy CFD you don't hold shares of nothing. A CFD is basically a contract between you and the broker. And the contract is basically like that. You buy at the current price and when you close the contract, you sell to close your position. The broker will pay you money if you sell at a higher price or you will pay to the broker when you sell at a lower price. So exactly like stocks. So now you may be wondering why do I suggest you not to trade with CFDs and wait, there is even an advantage of CFT, they give you better margin, meaning the leverage you get with CFD is better. So first I show you with Interactive Broker how it works, what I mean by better leverage. And later I tell you the three reasons why you should not trade with CFDs. And especially the number three I think is very important and is not something that many people know. So let's start. Let's say for example, you want to buy 100 shares of Apple. Now it's trading at around 260. So let's say you want to buy 100 at market, right? This is Apple and we submit order. So notice what happened. The total amount that you should pay is 26,201, right? But because this is a margin account, so this is what you are paying in Theory the value of your hundred shares. But you need to deposit. See this initial margin and also maintenance margin. You need only to put 6550. Okay, now what is the initial margin and maintenance margin? Basically, initial margin is the money you need to have at the beginning when you buy. And once you have bought the shares, you need the maintenance margin margin. Now this is 6,000 over these is basically a 25%. So is a four times leverage. What do we mean? Do I mean by that? Is that when you want to buy, you only need to put this amount of money 25%. Okay, and this is good news because sometimes we want to buy expensive stocks and we cannot use the cash we have because it will not be enough. So margin is good. Now what happens if we buy CFD instead? Let's have a look. It's quite interesting. So we close this and then we go here again and this time we want to buy, you see Apple cfd. So notice the price is basically the same. And I want to buy 100 shares again at market price. So this is the same, but notice the difference in terms of margin. Let me show you as before here. Now the initial margin is 3275. Remember before it was 6000 something. So actually this is a 12.5%. And once you buy, you only need 2620, that is 10%. So basically once you buy these 100 shares, you only need 10% of the position of the total amount of the shares instead of 25% that you have when you buy normal stocks. And this is good news, right? Because basically you need less money. Or if you want to see the other way, with the same amount of money you can buy more. So why is it bad? I mean so far you may be wondering, you only tell me good things about cfd, right? It seems that I should use cfd. Well, you know, when something is too good to be true, probably there is something bad. And the first one, the first bad thing that I want to share with you is the following. When you buy shares, you buy in the stock exchange. Okay? But when you buy. So let's write it here. The number one, when you buy shares, you buy in the stock Exchange. But the CFDs are contract between you and the broker. So in other words, if you make money, who is going to lose money? The broker. And if you lose money, who is going to make money? The broker. So there is a conflict of interest. Why? Because think about that. The broker is basically giving you better leverage. We have seen you only need to deposit 10% and not 25%. Okay? And basically the broker is losing money if you make money. So why the broker should help you to basically make money at these expenses. The broker is there to make money. It's not there because it's a, I don't know, charity organization or something like that. The brokers want to make money out of you. He can make money with the commissions, but then if he's doing something like that, there is something behind right now. The point is this. If you look and many people don't look at this stuff, but if you look here on the interactive broker, they tell you that 69% of retail investors lose money when trading CFDs. Now remember, because it's a contract between you and the broker. The broker can see where you place all your orders, where you place all your stop loss, where you place all your take profit, right? And knowing this information is quite good because they know basically the whole picture that you don't know. And this can be used by them to make money. And at the same time they also have a spread, usually meaning the bid and ask. And I make a video about that. The difference between a bid and ask can be wider than the normal stock. Meaning to say you want to buy. Let's say you want to buy at something, right? So the bid and ask. Let's say this is 10 and this is 1050. If you buy and immediately sell, what happens? You buy at 1050. Remember you always are in the worst case scenario. So you buy at 1050 and immediately you want to sell, you will sell at 10. So you are losing 50 cent per share. Who is making this money? The broker. So the wider this bid ask spread, right? The more money you lose when you do these transactions. So this is one way they make money. But as I said in CFD we also have the conflict of interest because they know everything you are doing. What about the second reason why this is maybe not a good idea? Well, it's related to this and is the counterpart risk. What does it mean? You are not buying shares of a company. You have a contract with the broker. If the broker goes bankrupt or if the broker has some financial, financial issues and cannot basically give you the money that you should get because you are making money with your cfd, then you lose. Okay. And if you watch one of my last videos, you know that brokers can go bankrupt. It can happen. So if you have a contract with them and you are making money and then something happened to the broker, well, you will not see the money. Okay, so. So this is another risk. That you should take into account. Now what is the number three that I think is the most serious one, frankly. Now the third one is about the interest that you pay. I want to erase that first and bring you back to the web page because there is something interesting to check. See here I have this page and I will put the links in the description. This is the interest that you pay when you have a CFD position. And basically we go here. When you are trading US dollars, for example, and your account is 100,000 to 1 million, basically, sorry, below 100,000 you pay 3.042% per annum. So this is the interest that you pay. Okay, so let's write it here. So we CFD is 3.042% for year. Great. Now let's check what happens when we have instead margin account. Remember at the beginning we were having the difference with the platform between CFD and normal account. So this is the normal account. So here you pay 3.06%. Okay, good. Let's write it down. So let's say margin and it's 3.06% for here. And this usually is charged every day. So basically every day that you have a position overnight, they divide this by the number of trading days in the year. And then this is what you get, you pay. Now you may say, well, this is slightly higher. So why you think that this is a problem? I give you an example. Remember we were looking at Apple. Let's say that you want to buy 100 Apple share. And let's say that you have a capital of 20,000 USD, just as example. Okay, so let's have two situations here. Number one, you buy 50 shares and number two, you buy hundred shares. Okay, so here we have the cfd. Okay, this way. So here you have the CFD and here you have the margin. That is basically you buy the shares. Now if you buy 50 shares, what is the position? Well, we have seen that Apple was trading at around 260 for simplicity. So this is 26, $200. 26, let's say, and this is $13,000. Now with margin, what happens? Because here you have 20k, right? And here the position is 13,000, you are using your cash. So here you pay no interest. But here, because you are buying 26,000 and you only have 20,000, basically you pay 3.06% on $6,000. That is the difference between what you have and your position. Okay, so far. Now what happens with CFDs? That's what happens here. You pay 3.042% on the whole $13,000. And here you pay 3.042% on THE WHOLE $26,000. This is the big difference between CFDs and margin account and why I don't suggest you to use CFDs because you are paying a lot of money for no reason, especially when the position is big. Now you may think that this amount is small, but when you start to have an account where you are trading and then you may have a large position, this can make a difference. So you know you can never control the outcome of the market. You know, you don't know if what you buy will go up or down. But something that you can control for sure is the commissions and the interest that you pay. So unless you're doing day trading and you need a lot of leverage because you are buying a lot of shares for maybe a few minutes or hours and you need this kind of margin, the 10%. If your strategy is okay with a 25% margin. In other words, if using this kind of account you always are able to buy the shares that you want, then I see no reason why you should trade with CFD where you have more risk because you have the counterparty risk, you have the conflict of interest with the broker. And you are paying. Here for example, you will not pay anything. And here you are paying. Here you will pay only on 6,000. Here you are paying on the whole 26,000. So basically there is really no reason in my opinion to trade with CFD if you are doing something that is not day trading or scalping. Okay? And I hope with this example you understood the difference. So probably next time when you are wondering, should I trade with cfd? And I know there is a lot of advertising online or broker that offer you to trade with cfd. Now if you use something like interactive broker, it's still okay because it's a good broker and, and it's quite big and is well respected. So it's also, yeah, I think it's regulated or maybe it's not, but I don't know. It's one of the main brokers that people are using. But you know, when you start to have small brokers that have no history that basically they offer you crazy deals, you know, always ask yourself, why are they doing that? Because remember, the broker is there to make money, right? So probably the broker don't want you to do what is not beneficial for the broker itself. That's why they are promoting stuff that maybe are good for them. It's more or less the same with the banks. You know, sometimes they offer you to invest in something, but when you really look into it, you realize that what they are offering is not maybe good for you, but but it's good for them in terms of commissions. So I hope with this video you learned something. If something is not clear about how this works, you can write me a comment. I'm happy to answer. And to clarify. If you like this video, put a like and share with other people. Because the idea of this channel is to share knowledge so you will avoid mistakes or things like that that are not mistakes. But basically, why paying money for no reason if you can save it? And with that I thank you for watching and as usual, see you next time.