Trading long/short: equities vs equity CFDs

Posted by on Jan 14, 2017 in ArbMaker News! | No Comments

What are the differences between trading long/short using equities as opposed to using what are called CFDs?

CFD is the abbreviation for ‘contract for difference’. It’s an instrument invented in the UK and behaves somewhat like a swap. Our trading account focuses on equity CFDs from Interactive Brokers (IB). The IB site has useful explanatory notes on CFDs here and a short video from them is below.

The key points of interest for our strategic approach are:

  • CFDs offer around twice the leverage of equity margin on a long/short trade
  • Suitable mainly for shorter trade horizons due to financing costs
  • No expiry date like options
  • CFD leverage works well with a hedged strategy
  • IB’s CFDs exactly mirror the underlying equity spread (which is far from the case with other CFD brokers)
  • IB has very low commissions for a frequent trading approach like ours.
  • Unavailable in some jurisdictions including the USA. Dodd-Frank Act legislation considers and regulates them as swaps.

Our experience and data show that equity-only trading under our approach beats benchmarks and broad market gauges. CFDs simply magnify that performance further.

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