Best option? Long term CFD position vs other?

911bill

Hi All,
I do some trading on the side, mainly FX and tech companies, I used 212 trading and do alright, I have been doing this for 4 years.
I don't have the time to babysit and trade using my usual methods so I'm looking to build a single position to "relax" a bit. So, to be open, I have a CFD position on NIO (Chinese EV company). They are currently trading at $14, they have seen exponential growth in the last few months.. I am very confident in the company's future and I want to put £20,000 into NIO for a long term hold, potentially 3-5 years, obviously dependent on progress. I have a fair amount more in my account so my margin will remains pretty healthy even on a disturbing crash (unless a crash to 0 occurs overnight)
So, my main question, CFD's realise the biggest gains thanks to leverage, there is a swap fee of approx. £25 per day. If I buy the actual stock through an investing/isa channel, the potential profits are not a patch on the CFD's, is there any other options here or a better way to go through a managed brokerage? I am more than capable of managing the trade myself but I am just wanting to ask on here incase there is a better solution out there of avoiding the swap fees.

I hope this comes across ok, any advice much appreciated.

Many thanks

EdGasketTheSecond

Call option or Spread bet.

DiggerUK

911bill, I have taken the opportunity to read your previous threads. You set alarm bells off everywhere.
I have you down as someone who isn't grounded with your head in the clouds. You likely will take that as an insulting ad hominem, but it is my honest assessment of you.

CFD's are a high risk, high loss, high casualty rate lifestyle choice. You have responsibilities with a family in tow, you're not single, free and footloose any more. It's not clear what your income is, or even what you both work at, but you seem hell  bent on cruising for a bruising.

This site is all about money saving techniques, not money squandering. It's  your life however, best of fortune..._

AnotherJoe

OP how about buying the longest out of the money call positions it's possible to? That way you are only on the hook for the money you spent and you can always roll them forward in a year or two if the timing isn't looking quite right. Then you aren't exposed to losses the other way that I understand is possible with CFD.(I have steered clear of these so not knowledgable how it can go wrong, is it like shorting?). 

I have a small position in Nio and maybe I might do better to do that myself as well. 

bowlhead99

911bill said:

They are currently trading at $14, they have seen exponential growth in the last few months.. I am very confident in the company's future and I want to put £20,000 into NIO for a long term hold, potentially 3-5 years, obviously dependent on progress. I have a fair amount more in my account so my margin will remains pretty healthy even on a disturbing crash (unless a crash to 0 occurs overnight)
So, my main question, CFD's realise the biggest gains thanks to leverage, there is a swap fee of approx. £25 per day. If I buy the actual stock through an investing/isa channel, the potential profits are not a patch on the CFD's,

Clearly if you are comparing investing £20,000 in a stock via an ISA or general investment account, to using £20,000 as a 20% margin for a CFD trade representing £100,000 of investment, then there are a lot more gains to be made when the £100k triples in value than when the £20k triples in value.

Still, if you are paying £25 a day for the interest swap, that's £9k a year which is a hell of a lot of overnight interest if it is only a £100k position.  It might make sense if you are using a lot more leverage, for example if you were using the £20k as a 5% margin on a £400k position.  Then the £25 a day or £9k a year is about a 2.25% interest rate on the £400k. So I wonder if you have done the maths right or whether you are really proposing to use super low margins and super high gearing.

You mention your margin account could survive a disturbing crash. Let's say you are not using the super high gearing of 5% margin CFD investing, and only the regular high gearing of 20% margin CFD investing:

Imagine the price simply falls back to where it was three months ago, at $3.50 instead of $14, which is a 75% drop from here. If you have a £100k position that falls 75% (£75k loss on the trade) it will cost you your entire £20k of margin plus another £55k to close it out; if you want to keep it open because it seems like a good long term punt you would need to cover that £75k loss and still have 20% margin in the account for the remaining £25k position it now represented (another £5k)?

So although you are going into it thinking "I want to put £20,000 into NIO for a long term hold", you would actually be using £80,000 of capital to support your investment in that scenario.    No wonder the potential returns from a conventional investment of £20k are 'not a patch on the CFDs' if the loss on the conventional investment is limited to £20k if the company fails with a 100% wipeout to shareholders, while the loss on the CFD investment could easily be £75k if the company does badly and is taken private with only a 75% loss to shareholders. Given your other recent threads talked about you being furloughed from your job, I'm assuming you are not proposing to use the whole £20k 'investment' as 5% margin for a £400k CFD position, because a 75% flash crash on that would leave you £300k out of pocket.

As an aside, if looking at other investment options you probably couldn't hold it in an ISA because the trading at $14 per share in this Chinese company is only via an american depositary receipt on the new york stock exchange; the underlying share itself is not listed on an HMRC approved stock exchange hence not ISA eligible. I hold a small amount of shares in an unwrapped general investment account. 

If you are thinking the interest swap charge via your CFD provider is high (and it does sound very high if you are margining £20k at 20% so only really 'borrowing' £80k, and paying £9k a year for the privilege...) then consider using a spreadbet. They can be a bit inefficient in terms of commissions due to the spread when you take them out or roll them over periodically (which you would do a number of times if holding for multiple years), but if you made 5x your money it would all be tax free, whereas making 5x on your money through a CFD would cost you 20% in capital gains tax above the exempt amount. 

Alternatively as mentioned by EdGasket or AJoe above, a call option (or series of them) on  the share price above a certain level may be more suitable than a straight bet or CFD, while providing a similar 'geared' upside.