Tuesday, May 20, 2008

Funding a CFD Account

I haven't opened a CFD account yet but am thinking about where the money is going to come from. $2000 would be enough to get started with (City Index allow you to open an account with $100!) but I'd probably want to put in $5000 to comfortably trade a $25,000 position. The money could come from the following sources:

1. Cash: We have about $1500 available in our cash management trust (money market account) at Adelaide Bank. So that can get me started, but it will need to be replenished as we have quite a few big expenses coming up - Snork Maiden's immigration fee - $2060, a trip to China (only one plane ticket for me - Snork Maiden's expenses are covered), and some office equipment for me - a decent chair, a new desktop computer (I like to have two computers in case one fails and also I can run the same software on more than one, or keep my trading on one and other work on another - all things where multiple screens don't cut it). My desktop (iMac) is from 2002. Probably adding more memory would solve its problems but I already added memory to it.... oh yes and a printer/fax machine but that one is a luxury. We also have cash in the US, but I am thinking that the US Dollar will go up (maybe a forlorn hope) so I don't want to transfer any of that to Australia.

2. Borrowing: We can borrow on our CommSec margin loan at 10.35% up to $20,000 or so at the moment. I could borrow in the US too on a margin loan but, again, I don't want to sell U.S. Dollars. At the end of June we should get distributions from our Australian funds which will go into paying down our CommSec debt a little.

3. Selling Investments: Most likely candidate is Colonial First State Geared Share Fund which I hold in a non-margin account - I've made about $7000 (22%) on this since mid-March. I could sell other things (again I don't want to sell stuff in the US and transfer money here) but I don't really want to sell anything else at this point and this is the easiest to do.

Borrowing increases leverage while selling reduces portfolio beta (sensitivity to stock market moves) and keeps leverage constant. Debt has a certain effect while selling an investment has uncertain effects - we might miss out on investment returns or be happy we sold before losses occur. I'm thinking to sell and take down market risk a little rather than increasing leverage to invest in trading which would increase market risk. After all, I'll still have more in that managed fund account than I had in March.

BTW a CFD is effectively a swap derivative. You pay interest to the provider and they pay you the cash flows associated with the security in question (and vice versa for a short position).

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