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.