Using CFDs (Contracts for Difference) and Spread Bets

When I first started trading my own portfolio I would buy actually equity positions on the stock market. I found that a lot of my money was tied up owning too little positions plus owning actual shares means you do not have the advantages of other vehicles such as guaranteed stop losses and the ability to leverage to buy a larger positon than you ordinarily would.

Several years ago I started using Contracts for Difference (CFD) and Spread Betting thorough Igmarkets and IgIndex respectively.

So what are the pros and cons of each:

CFD's
Pros - ability to leverage a position using margin (i.e. you can buy £20,000 of a FTSE 100 company for £1000 margin down payment), guaranteed stop losses are available (even if a company goes bust you are guaranteed the stop price, with normal shares you often cannot sell in a steeply declining market), can go short (sell a share with a view it is going down) or long (buy a share with a view it is going up), free from UK stamp duty
Cons - It is a leveraged product so you need to be careful about having enough margin if the price of one your portfolio constituents suddenly moves, you pay interest on the cash value of the positions you own (which can add up over time), guaranteed stops not always available on volatile AIM stocks, you are still subject to capital gains tax (if you go over the annual allowance)

Spread bet
Pros - leveraged like CFD's, not subject to capital gains tax or stamp duty (since technically a bet), guaranteed stops available (though not always on AIM)
Cons- limited time scale (you have to buy a position based on price 1, 3 or 6 months ahead), you pay a premium in the spread (the difference between buy and sell which is increased on guaranteed stops), a large margin can be required especially for small cap shares

FTSE back to 6,000 mark on manufacturing data

The FTSE 100 closed up 42 points at 6,000 after U.K. manufacturing data proved particularly strong and positive corporate results from constituent Imperial Tobacco (IMT) which ended up 6% after its sales for the final quarter of 2010 were up 5%. Strength in commodity stocks also helped the index. The U.S. market is relatively stable, with the DOW up 11 points at 12,051.

On the Contrarian Investor UK portfolio front its been a stable but uninteresting day. Every stock finished up, but by relatively small percentages. Interesting that Rockhopper (RKH) finished in positive territory after a sell off this morning and Xcite had some relatively big buys at the close. By generally nothing much to report. Hopefully some good RNS's to get my teeth stuck into tomorrow! Sorry to readers that there's nothing earth shattering to write about.

Rockhopper tension builds

I haven't posted much on North Falklands basin oil explorer Rockhopper this week despite buying a few spread bets over the last week or so. Most of the rumours coming out of the "pub in Port Stanley" brigade don't seem to hold any credence and after all the nonsense relating to Desire Petroleum and the huge swings in share price purely on a couple of bulletin board posts I'm taking everything with a big "pinch of salt".

Unlike other Falkland Oil drillers, Rockhopper isn't a complete shot in the dark i.e. not a binary bet of betting on exploration success. Goldman have RKH as a conviction buy with a 12 month target gives so the current £3.68 share price, because of the the Sea Lion discovery with its 200 million barrel reserves. This offers downside protection to any failure on the current well drill.

If the 14/10-3 well has a positive hydrocarbon result this will be transformational for Rockhopper. The new well is around 8km from the Sea Lion discovery, and oil will confirm the geology of the oil structure in the North Falklands basin. It is likely in this event that recoverable reserves could be closer to 1 billion barrels not 200 million. This would make it an exceptional commercial opportunity and move the share price many multiples higher.

So in summary I like Rockhopper's risk/reward ratio because £3.68 is protected on the downside by 200 million barrels of oil and the upside is £10-20. This is different from Desire for this key reason, the company already has oil and plenty of cash in the bank for additional wells and seismics if 14/10-3 fails. I believe a buy below £4 with news expected any day now, is not foolhardy by any means and not a roulette wheel gamble. I understand the caution after a lot of smaller investors lost buckets of money on Desire Petroleum, but we have a different much sharper animal here! Good luck all holders, I'm glued to the RNS screen.