Stuart McPhee and Mark Cook talk about how to play the stock market using CFD trading.
Mark: ‘there are so many different types of persons coming into trading and it really can attract from every type of field, background, capital, age, education.’
Stuart:’ Background, upbringing. I think one of the most ironic things about money or trading and money is we focus on the money because that is why we are drawn into trading, for most people. Yet that is the thing that makes us become unstuck because we worry about money so much and we focus on it and we don’t want to cut losses and cut losing trades.
So it is a bit of a kick that we are drawn in because of the money and yet that is the one thing that causes us to become unstuck. Paul Tudor Jones said in the first book, don’t focus on making money, focus on protecting what you have. That is a real shift that we’re probably not aware of when we start our trading plans.
The other night I heard you speak and you said something that really hit home with me. You talked about early on you were trading with some of your relatives’ or friends’ or your mother’s money and you lost a lot of it and there was an interesting thing that happened between yourself and your mother that had a defining effect on you. Would you mind just explaining that?’
Mark: ‘Well my mother, she lost 0,000 that I was directly responsible for and when we talked about it she asked how much money I had lost. And I had lost 0,000 at that particular time so I looked at her and she gave me words of inspiration instead of words of condemnation which made me go forward. And she asked me how soon I thought I’d get the money back which I thought I was never going to get it back. Then because of that I had installed in me an element of hope.
The next thing she said to me was, “When you called me and wanted to talk to me and you sounded as if you were in dire straits I thought it was something really bad, like you had cancer.” She said losing money is something you can get back. And it really put things into perspective and it put money really low on the priority list. Knowing how to play the stock market was really not at the top of the list.
Stuart: ‘So do you think if she hadn’t said, so when are you going to get it back or how long is it going to take for you to get the money back, do you think you were going down the path of, this is a hard hit, I probably don’t think I can keep going or I’m really going to struggle a little bit?’
Mark: ‘She had always been an inspiration to me, she knows what to say at the right time. I don’t know if she believed in what she said.’
Stuart: ‘And the other thing you said about the perspective. I say to a lot of people. We may have a few losing trades in a row. We may end up losing 00 over a week which isn’t a huge amount of money, but if it is done over three losing trades you think it is not for you, this is a terrible run. You know I say to people, if you have your health and your home and all these other things and both of us live in great countries. If losing 00 is the worst thing that is going to happen to you this week, life is pretty good. I think perspective is something we should consider. Knowing how to play the stock market with trading plan will include lots of highs and lots of lows.’
A CFD (Contract for Difference) is an arrangement between two investors to trade on the difference between the start price and finish price of a contract at the end of an agreed timescale without either party needing to buy the shares themselves. Sounds complicated, but its not really. Many investment groups and hedge funds have found a great deal of success with CFD Trading for over ten years now within the UK stock markert as an alternative to traditional sharedealing. They are many similar comparisions between CFD trading and spreadbetting in that both of these are margined products so you can gear yourself up or actually take a decision that is a multiple of your available funds.
So for example the margin on a firm youre interested in was 10%, establishing a position of £100,000 would really only require a deposit of £10,000. Any running profits that you make can be used as margin to esablish new positions but any running losses would have to be made good by actually reducing your position or finding additional funds.
While stamp duty of 0.5% on all UK share purchases has in the opinion of some traders reduced the cost effectiveness of ‘day-trading’ traditional stocks and shares, both CFDs and spread betting are exempt and this seems to have added to their appeal. CFDs are liable to capital gains tax whereas spread bets are tax free, but losses incurred from spread bets are gone for good while CFD losses can be offset against future profits for the purposes of tax. When you trade in CFDs, you purchase those contracts in almost the same way that youd buy shares. Let’s say you wished to invest on a thousand shares in a business – with CFD trading you would need to sell 1,000 units at eg 494p per share, whereas with spread betting you would just place a bet of £10 per point to get an equivalent return.
A lot of CFD providers allow you to post orders anywhere within the bid offer spread whereas spread betting firms post their own two-way, take it or leave it price in the same way a bookie would. Most CFD providers allow you to post orders anywhere within the bid-offer spread whereas spread betting firms post their own two-way take it or leave it price exactly as a bookie would. CFDs do not wrap the costs of financing a position within the spread (as does spread betting) but charge those costs and commissions on an individual basis. With CFDs the charges and commissions involved in a trade are not part of the spread, which is the case with financial spread betting. Because of this, the CFD spread quote will forever be very close to the underlying price of the share or commodity that you are following. CFDs also mimic nearly every aspect of owning the underlying share or market, so if you hold a position for a long enough time period you will recieve the benefit from any dividends being paid on the shares.
CFDs and spread betting have particular features that will appeal to different trading styles and there is no one best instrument to use. However they should not be regarded as substitutes for long term investment or saving, as more people seek to take control of their financial destiny, theres been a growing realisation that going short is a legitimate means of trading in market thats become progressively difficult to profit from in a traditional sense.
Here’s a brief interview that covers stock trading and trading plans for beginners.
STUART: I’m joined in Dalian, China by one of my mentors, Daryl Guppy. I know you do a lot of work in China, so it’s great to see you here in this amazing city, and I think every city in China is becoming amazing because they’re growing so much. I just wanted to ask a few questions on trading plan. I guess because we’re in China and you do a lot of work here, and we’re all worried about this global financial crisis and the recession talk and everything, how’s China handling all this?
DARYL: China’s doing okay compared to other places. But a pullback of even just a few percent in terms of GDP is as significant as a pullback of a few percent in Australia. So Australia’s talking a GDP of what? 2? 2-1/2 percent? Whereas, China’s pulled back from 11 percent to 9 percent. That’s a 2 percent drop. It doesn’t seem much because 9 percent sounds much, much better than 2-1/2 percent.
STUART: Sure does. DARYL: But it still has a significant impact on the Chinese economy. So the key factor in the Chinese economy is it strengthens domestic demand. That’s what’s really driving this economy, and that’s the major political factor that the government has to consider. It has to keep domestic demand strong and keep the drivers strong, and it will turn away from overseas work to concentrate on what’s happening domestically because overall exports for China represent about 2 percent of GDP, 1-1/2 to 2 percent. So it’s not that significant, but for us of course, exports from China are a significant part of our economy.
STUART: Could China actually emerge out of all this as the leading economy in the world. I mean, people want to put their money here, don’t they?
DARYL: Certainly that’s the case, and there are currently discussions at the moment to establish the yuan as a reserve currency, and now we had three reserve currencies: the U.S. dollar, the euro, and Japanese yen. Now to recapitalize world financial markets, we really have to draw on Chinese yuan reserves. So the current discussion that’s taking place is at a ministerial level in China. First of all, they want a seat at the table in the discussion of how to resolve this world financial crisis. All of this turmoil does not make it easy for stock trading for beginners.
Part of the price of their admission is the potential for the yuan to act as a reserve currency. I’m not sure if it’s right or not. It’s stable. It’s secure. So many people have been pouring their money into the U.S. dollar as a safe haven, which potentially it may not be a safe haven, but people see it as that.
DARYL: With respect to that analysis, yes, perhaps not 100 percent in the sense that there has been a tremendous flow of money out of what we call emerging or developing markets, U.S. money back to the U.S. It’s a flight of fear, not a flight of quality. This is part of what’s driving the U.S. dollar up at the moment, and counterpoint the dramatic declines in AUD, in euro, and Japanese yen, etc. I mean, you have 16 percent moves overnight. These are not things that are normal in currency markets. It is not an easy time for stock trading and CFD trading for beginners.
Over the past century many have made their fortune and generated huge amounts of money as the late great billionaire J. Paul Getty managed to do from oil.
The ever increasing demands on oil supply to power today’s energy needing consumer, continues to grow globally for oil as the energy source of choice for cars, heating, machinery etc. Countries experiencing significant growth cycles such as Russia, Brazil, India and China continue with their increased consumption to fuel their growth ambitions, placing even more demand on the finite oil resources.
Whilst significant oil resources still remain untapped in areas such as Canada / Alaska, extraction of the oil in these areas is only economically viable at the much higher oil prices seen in recent years.
The impact in 2008 for the retail consumer was well covered by the world media and felt hard by us all globally as the price of oil soared from $85.42 as of Janurary 22nd 2008 to $147.27 in July 11th 2008, at that time many industry experts had predicated oil would continue the established trend and trade at $200 a barrel. The credit crunch and resulting cycle of wealth destruction globally during the second half of 2008 impacted demand for black gold with the price per barrel falling to $32.40 on the 19th December 2008. It has certainly been a roller coaster of a ride for oil in 2008. But it’s an opportunity for those in the know – the speculative investor – to make significant gains from trading, or of course to have made significant losses.
Whilst the media attention has slowly been pushed away in recent months to focus on the bigger demise of the banking sector, Oil has slowly been making a spectacular recovery from the $32 December lows to hit $70 in recent weeks, the industry experts are now calling for $85 dollars a barrel whilst others suggest a short term correction may be in order. Whatever the future holds the oil trader and speculator has the opportunity to profit from such moves if their opinion on the direction proves to be correct.
For the retail investor gaining exposure to either NYMEX Crude or BRENT Crude at first may not seem that straight forward, whilst the opportunity to trade Oil Company stocks or purchase Exchange Traded Funds (ETFs) (which can provide exposure to oil prices) has traditionally been the only obvious route through your online stockbroker, Financial spread trading and Contracts for Difference (CFD) trading makes accessing these commodity markets relatively straightforward. Investors can then take either long or short positions via the spread bet or CFD and trade the fluctuations in price in this and many other markets. Spread Betting firms and CFD providers also provide a wide range of market information, charting resources and trading technology which gives the retail investor access to a wide range of information. The weekly Crude Oil Inventories Update will actually provide real time market information for relevant trading data.
Once a week, the Energy Information Administration (EIA) gives us a glimpse into what the future demand for oil is going to be by releasing its Crude Oil Inventory numbers. Traders will look for this sort of information because the amount of oil commercial firms have in inventory impacts the price of oil in quite a predictable way when taken into account with other factors in determining future oil prices.
The Crude Oil Inventories numbver reports the number of barrals of oil that commerical firms have in inventory. Although commercial firms will report their inventory levels to the EIA on a weekly basis the EIA must still make some estimates to arrive at the final number.
Another organisation which has a significant impact on the price of oil is OPEC – the Organisation for Petroleum Exporting Countries.The OPEC is a group of twelve different countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. The cartel is headquartered in Vienna and hosts regular meetings among the oil ministers of its many Member Countries.
According to its statutes, one of the major goals is the determination of the best means for safeguarding the cartel’s interests both individually and collectively. On top of this it also pursues different ways of ensuring the stabilisation of the prices in international oil markets, with the view of exterminating harmful and unnecesary fluctuations; at the same time giving regard at all times to the interests of the nations producing and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and of course a fair return on their capital to those investing within the peroleum industry itself.
The OPEC will release a Monthly Oil Market Report with other small bulletins which also impact market pricing which oil traders from across the globe wait for.
Whilst trading oil may seem the preserve of an elite group of traders in London, Chicago or elsewhere in the globe, the price of petrol or gasoline directly impacts everyone in the developed world. It impacts the cost of transporting goods and services to every area of the globe and as we saw in 2008, this can have a negative impact both on the price we pay for personal transportation at the pump, but also the cost of basic food and services we rely on in our day to day lives. Whilst we saw little pull back in pump prices during the past 6 months these same experts predict a return to higher pump prices in the future which could impact us all.
Some have therefore turned to spreadbetting and CFDs to hedge their exposure to rising fuel costs by placing medium to longer term trades which pay out if oil prices rise across the globe. This approach can also be made relevant for small as well as medium sized businesses exposed to the oil price moves- from hauliers, farmers and fisherman to practically any business that can be impacted by rising fuel costs. Giant companies have done this for many years,airlines hedging fuel costs to ensure any unexpected sharp rises in crude do not impact their budgetary plans in any fiscal year. In 2008 many haulier firms folded due to the rising cost of fuel but also due to fuel taxes in the UK remaining high – approximately 61% of the cost paid at the pump is tax revenue for the UK government, European haulier firms subject to lower fuel taxation were able to generate a significant competitive advantage against the UK haulage business at this time who were left unable to pass the full cost of rising fuel onto their customers.
Beyond hedging, spread betting and CFDs also allow investors the opportunity to trade on oil companies’ stock prices – from the Exxons, Shells and BPs of this world to the smaller exploration outfits, drilling as Getty did over half a century ago for that next 20,000-barrels-a-day oilfield and the opportunity to make a lot of money.
