Contract for difference (CFD) trading is about making gains from the upward or downward changes in the price of an underlying asset. You trade this financial derivative without owning the underlying asset, such as shares, indices, commodities, or currencies.
Trading in CFDs may give you huge gains, but it isn’t easy. The wrong speculation can lead to hefty losses that may go beyond your investment. Thus, it requires thorough knowledge and knowing the risks before trading CFDs.
This comprehensive guide helps you start CFD trading. Here you will learn the concept of CFDs, the benefits and drawbacks of trading them, the best brokers in the market, and the steps needed to place your first CFD order in Australia.
1. What Is CFD Trading In Australia?
Contract For Difference (CFD) is a financial instrument enabling traders to speculate on the price movements of an underlying asset. Traders profit when the price of the asset moves in the direction stated in the contract.
According to ASIC, CFDs are derivative investments as their value is derived from the value of another asset, which can be stocks, currencies (forex trading), cryptocurrencies, indices, and commodities such as gold, iron ore, oil, and wheat.
CFDs aren’t standardized contracts. They don’t involve acquiring or owning the underlying asset and only refer to any change in the asset value. The flexibility to trade CFDs outside the regular market hours on certain markets enables traders to make the most out of their investments.
2. What Type Of Assets Can Be Traded Using CFDs?
You can trade CFDs in a range of asset types as the market in Australia is growing. These includes:
3. Is CFD Trading Legal In Australia?
Yes. It is legal to trade in CFD in Australia. However, you must open a CFD trading account with a regulated broker. Make sure the broker is regulated and check for an Australian Financial Services license number. It ensures your investment remains safe.
We recommend eToro, the best broker for Australia and worldwide. The platform also offers copy trading, where you can follow other traders and adapt their trading strategy. You can create an eToro account here.
4. How Does CFD Works?
You can trade CFDs in two different ways. One way is going long, and the other is short. Going long implies you expect the value of the underlying asset to increase over time, and going short means you expect it to reduce with time.
If the market follows your speculation, you get paid the difference in value. However, if it doesn’t, you will owe the difference. However, you must be mindful that any incorrect assumption can lead to losses more than your initial capital due to leverage.
Since the CFD is a legally binding agreement, if the market goes against your prediction, then the CFD provider:
Ask you to pay the additional money to keep your position open. It could result in further losses.
May close your CFD position at the current value, which may lead to losing all your invested money.
CFDs don’t have an expiry date, and any party can close out an open position or sell an asset. Daily CFDs don’t have expiry dates. However, they are subjected to overnight financing charges.
Forward CFDs expire at a future date, and the spread includes the financing-related cost.
5. Key Concepts Behind CFD Trading
CFDs quote the buy and the selling price:
The Sell Price/ Bid Price: It is the price at which you open a short CFD
The Buy Price/Offer Price: It is the price at which you open a long CFD
The difference between the two prices is called the “Spread”.
CFDs are exchanged in standardized contracts, also called “lots”. The contract size varies based on the underlying asset traded.
You can usually buy CFDs in multiples of 1000s, and every CFD has its price. Generally, the cash expense is 5% of the CFD value. The initial expense calculation is the price of the CFD Contract x the Number of CFD contracts bought x 5%.
For commodities CFDs like Silver, they trade in lots of 5000 troy ounces. In the case of stock CFDs, the contract size represents 1 x share in a company.
Unlike derivatives, CFDs don’t have a set expiry. It allows traders to decide when to book a profit or loss. If you keep your CFD position open after the daily cut-off time, you will have to pay an overnight funding charge.
Profit And Loss
The two parties who enter a CFD contract gain or lose based on whether the value of their underlying asset rises or decreases.
Gain or loss in the contract = (Open price - Close price) * the number of underlying shares/other assets formalized in the contract * value of each contract – (overnight funding charges / guaranteed stop fees/commission).
6. Steps To Invest In CFDs In Australia
Here are the six simple CFD trading steps you will need to follow to start CFD trading:
Step 1: Learn How CFDs Work
The first step to starting trading CFDs is to learn how they work.
Understanding the concept of CFD trading, its terminologies, how it differs from other forms of trading, and its strategies can help you trade effectively.
You may consider taking a 45-minute beginner-level free CFD trading course by IG Academy to learn about CFD trading, its benefits and risks, why to trade in CFDs, and how to make the most of your trades.
Step 2: Open And Fund An Account
Compare brokers offering CFD trading on factors such as Regulation, Fee, Ease of Use, Platforms Supported, Markets Served, etc.
We recommend eToro, the best social trading broker for Australia and worldwide. The platform offers copy trading, where you can follow other traders and adapt their trading strategy. You can create an eToro account here.
Having decided on a CFD trading platform, create an account. Next, fund your account via credit card, debit card, BPAY, or PayPal to place the initial CFD trade.
Some platforms offer demo accounts to help newbies practise with AUD$20,000 of virtual funds to build their market confidence in a risk-free environment.
Step 3: Learn To Use A Trading Platform
CFD brokers provide a variety of platforms to fit your trading style and preferences. You receive access to plenty of features, including interactive charts, risk management tools, and personalized alerts to take trades wisely.
Before you place your first CFD trade, gain proficiency in accessing several trading platforms:
Mobile trading apps
Step 4 - Choose A Market
Step 5: Develop A Trading Plan
Once you have created your account, you must develop a trading plan that includes your motivation, objectives, ideal trade, attitude to risk, acceptable loss, desired profit, and available capital and risk management strategies.
Step 6: Place Your First Trade
Having decided which market to trade in, you now need to learn how to open, monitor, and close your first position. To do this, first, decide whether you want to go long or short. “Buy” if you think the price will go up, and “Sell” if you think it is going down over time.
Next, choose a trade size you can afford and add a stop loss that automatically closes your position if the market moves against you. It limits your potential losses.
You can choose from a range of risk management strategies, including:
After you open the position, your profit or loss will move following the underlying market price. Next, keep an eye on your open CFD position on the platform and monitor price changes leading to any loss or profit.
When you are ready to realize a loss or collect a profit, then exit the trade by clicking the ‘close’ button. If you did open a position on the buying side, you can close it by selling an equal number of contracts at the selling price and vice versa.
7. Benefits And Drawbacks Of CFD Trading:
Advantages of CFD Trading
Potential to make big profits due to leveraged products and smaller investments
Protection against loss
Facility to trade them across thousands of financial products and overseas markets
No expiry of CFD contracts
Risks of CFD Trading
CFDs are prone to liquidity, market, and counterparty risks that may not make them ideal for everyone.
CFDs depend on the market conditions of the underlying asset, making them a High-Risk financial instrument.
Leverage (trading with borrowed money) can lead to multiplied losses. A small price change against your CFD position can hugely impact your trading returns/ losses. As many retail clients lose their initial investment when trading CFDs, consider whether you can afford to lose your money
CFDs are complex to understand and execute, which makes them suitable for advanced traders.
It may have hidden clauses that the trader is not aware of.
Sudden price movements in the market can make you win one moment and lose the next.
Consumer protections under Australian laws may not apply to overseas CFD providers as they do not have an AFS licence. It implies that you won’t have access to independent dispute resolution via the Australian Financial Complaints Authority.
8. Main Types Of CFDs
You can access three CFD types: DMA, Market Makers, and Exchange-traded. While the first two are the most common methods used in Australia and worldwide, the ASX provides exchange-traded CFDs.
The best way to trade CFDs requires you to understand each of these types of CFDs:
Direct Market Access (DMA)
Independent firms provide this type of CFD account, which allows financial agencies or investors to access liquidity to buy and sell securities directly without involving dealers and brokers.
You can specify your trading goals and modify them without contacting a trading specialist.
Take more or less risk based on your previous performance, trading experience and skills.
The electronic environment enables fast transactions and fewer price discrepancies or differences in price than when placing an order with a dealer or a broker.
You can use buy/sell anytime when it suits you.
Ideal for skilled and experienced traders. Not ideal for inexperienced investors as the inability to read trends in time can risk losing money.
It offers a comparatively smaller offer range than other CFD trading types like a Market Maker.
Insufficient trading in the underlying market may prevent you from opening and closing CFD positions.
This type of trading creates its market and sets the buy and sell price for the underlying asset:
You do not have direct access to the market as with DMA.
Newbies can get advice from their broker or dealer on investing in CFDs.
The assets reach broader markets and a higher liquidity level in the market.
Higher liquidity enables you to trade even with inadequate trading in the underlying market.
It involves higher commission and brokerage fees.
The broker can re-quote the prices after placing an order.
This CFD trading lets you trade CFDs listed on the Australian Securities Exchange through authorised brokers or dealers. Buyers and sellers don’t deal directly but via the ASX24 that processes, registers, and clears all the trades.
The counterparty risk is lower on a gradual basis.
Newbies can use the consulting services of their dealers or brokers to perform the trade.
It charges higher commission and brokerage fees.
Experienced traders can’t trade directly. They must open an account with a brokerage platform before trading in CFDs.
9. Can You Trade CFDs In Australia?
Various brokers offer CFD trading in Australia:
|Broker Name||Min. Opening Deposit||Commission - ASX 200 Shares||Available Markets||Platforms|
|eToro CFD||US$200||No commission||Forex, Shares, Indices, Cryptocurrencies, Commodities, ETFs||eToro Trading Platform|
|City Index CFD||$0||0.08% with a $5 minimum||ASX shares, 4,500 global shares, indices||MetaTrader 4
|AvaTrade CFD||$100||No commission||ASX shares, global shares, indices, metals, cryptocurrencies, commodities, ETFs, options, forex||AvaTradeGO
|Plus500 CFD||$200||No commission||CFD on Forex, Commodities, Cryptocurrency, Indices, Shares, Options, and ETFs||Plus500 Trading Platform|
|Capital.com CFD||$0||$0||Forex, Shares, Indices, Commodities, Crypto, ETFs||Mobile Trading Platform|
|IG CFD broker||$0||0.08% with a $7 minimum||Indices, FX, Shares, Commodities, Cryptocurrency, ETPs, Options, Interest Rates, Bonds||MetaTrader 4
IG Trading Platform and Apps
|$0 for a standard account||Forex, indices, commodities, metals, share CFDs, ETF CFDs, futures||MetaTrader4, MetaTrader5, ThinkTrader|
|CMC Markets||$0||0.09% with a $7 minimum||Forex, Indices, Commodities, Cryptocurrencies, Global shares, ASX shares, Bonds||CMC Next Generation CFD, MetaTrader 4|
11. Frequently Asked Questions (FAQs)
How Much Money Do You Need For CFD Trading?
The costs of CFDs depend on the market you prefer to trade in and the market liquidity. You generally must pay only a commission charge for stock CFDs and a spread for all others.
It is important to note that every market has a minimum number of contracts you must purchase or sell to place your trade. Traders also pay for guaranteed stops, financing costs to fund positions overnight, and extra fees for specialist tools.
What Is The Difference Between CFDs Trading and Regular Stock Trading?
Let us look at the CFDs Vs Stocks below:
The fundamental difference between trading in CFDs and stocks is that when investing in shares, you buy and own the underlying asset. However, with share CFDs, you do not own them as you own the contract provided by the CFD provider and speculate on whether the share price will rise or go down without owning it.
Since CFDs trade with leverage, there are possibilities of losing more than your initial investment. However, in the case of trading shares, you make the full payment of the position upfront and can’t lose more than you invest.
Another difference between stock trading and CFD trading is that in the former case, you can trade only stocks and ETFs, and in the latter, you can trade in a wide range of asset types such as forex, indices, commodities, and shares.
CFD trading is also available during extended hours (after standard market hours). You can trade around the clock in several markets. On the other hand, with stock trading, you can only trade during stock exchange opening hours.
While you get the right to vote and participate in other corporate actions when trading stocks, you don’t get shareholder privileges with CFDs.
Are CFDs Good For Beginners?
Whether you are a new or an experienced trader/investor, CFDs can be a part of your strategy. However, considering the complex nature of CFDs, only those CFD traders with good knowledge and experience in the financial markets can benefit from this financial instrument.
Inadequate knowledge can result in losses that exceed your deposits. CFD trading for beginners is only worth considering when knowing the financial markets in and out, the meaning of CFD trading, the circumstances, and the benefits, risks, and strategies associated with CFD trading.
Is CFD Good For Trading?
Yes. CFD trading is a great way to trade different types of assets and generate profits. It allows traders 24-hour access to various futures and cash markets. Taking a CFD position gives you the following features and benefits:
Diversify your portfolio with over 30 global indices, including stock indices, sectors, and more.
Open a position in numerous sectors, such as retail, mining, and banking.
Enjoy greater flexibility to select your position size for mini and standard contracts.
Trade with no expiry dates
Mobile and tablet apps are available to trade and monitor positions on the go.
Use leverage to take your investment capital go further.
Protect your physical portfolio from adverse movements (both falling and rising stock prices) through hedging and Short-sell.
Able to trade Australian and global shares from the same account
Use direct market access to trade inside the market spread.
How To Choose The Best CFD Trading Platform In Australia?
There is no best CFD brokerage in Australia for everyone. It depends on individual needs and factors such as margin requirements, fees, spreads, etc.
Look for a CFD trading broker that offers the following:
Low spreads, transparent fees, leverage and margin requirements help maximize your position size.
Provide easy-to-use and intuitive platforms. Most CFD trading websites use the popular MetaTrader or MetaTrader 5 systems.
Should offer competitive prices
Should enable you to trade in a range of markets
Should provide free access to ASX live data (without any additional charge)
Should process trades fast and reliably each time
Should check user reviews to gauge their satisfaction
Should provide negative balance protection
It should be convenient for beginners and allows opening a demo account.
Should provide ample research and trading tools such as trialling signals, charts, and any other analysis tools to help you make lucrative trades
eToro is among the best CFD trading platform, with millions of users across Australia. It is a multi-regulated broker that allows traders to trade in currencies, commodities, indices, stocks, and more in a single product portfolio.
Some of the features of the platform are:
Enjoy low and variable spreads as low as one pip for USD/JPY, and EUR/USD
Safeguard your investments with advanced risk management features, such as customizable stop loss, and real-time alerts
It offers a $100,000 demo account to experience risk-free CFD trading
Its CopyTrader feature enables you to imitate the trades of other traders automatically in real-time
Dedicated customer support 24 hours, five days a week
Is CFD Trading Taxable In Australia?
The CFD trading tax in Australia depends on whether you are operating as a business. If you make any profits from your CFD trading, you may owe tax. It is mandatory to declare the total profit and loss to the Australian Tax Office (ATO).
The ATO states that if you are a small business operating as a sole trader, you must keep a record of income and expenses. The amount of tax you owe will depend on how much profit you make.
The CFD trading taxes in Australia work the same way as taxes on other instruments, such as forex and stocks. A loss can be offset against your total tax liability and carried forward, while profits will be taxable.
What Are The Differences Between CFDs and Futures?
Let us look at the CFD vs futures below:
Both are financial derivatives for speculating on markets without owning assets but they work very differently in practice.
Types of Trading:
Primarily OTC trading
|Ways of Trading:||Long/Short||Long/Short|
|Tradable: Commodities||Stocks, ETFs, forex, indices commodities||Forex, indices, commodities, bonds|
|Leverage:||High leverage (1-100)||High leverage (10-20)|
|Trading Hour:||24 hours a day||Fixed|
|Extra Expense:||Yes (Overnight fee)||No|
Is CFD Trading Difficult?
CFD (Contracts for Difference) trading can be difficult, particularly for new adopters who aren’t familiar with the terminology and the importance of research and discipline to succeed in CFD trading.
Practising with a demo account can be helpful for first-timers before they trade with their own money. It will help them learn the basics of trading, identifying buy and sell signals, predicting short-term price direction, and using “leverage” that heavily influences a trading strategy.
You can only form an effective trading strategy when you understand the market and the financial instrument.
Like any other trading method, CFD trading can be risky and difficult initially, but with regular practice, you can master the skills and generate decent gains from the trade.
Can You Trade CFDs on COMMSEC?
No. CommSec no longer offers a CFD trading facility to its users.
Can You Make a Living Trading Contracts For Difference (CFDs) in Australia?
Some people do make a living by trading CFDs in Australia. However, there is always a possibility of losing money as financial markets can become unpredictable. You must have trading expertise and a wealth of experience to become a successful trader.
Can You Become A Millionaire Trading CFDs?
CFD is a risky financial instrument that may make you a millionaire or a poor person. The leverage that enables you to take larger trades can make you a lot of money, but it can also lead to heavy losses (more than your investment) if your speculation goes wrong.
How CFD Is Different From Options?
To understand the differences between these financial instruments, check the comparison between CFDs and options below:
CFDs offer a broader set of markets for trading in comparison to Options.
CFDs are relatively more transparent, as the price of a CFD contact moves one for one with the underlying market.
Compared to CFD trading, which is margin trading, options incur a lower trading cost as they are inherently leveraged.
The lack of financing costs makes Options a better trading choice as they can be held long-term at a lower cost. However, having the same CFD contract could quickly incur huge funding charges that apply daily to CFD positions.
An Option can turn worthless, causing the trader to lose his initial investment after it expires. This is not the case with CFDs, as they come with no expiry date.
Options are much more difficult to understand compared to CFDs. Also, since they are sold as a separate trading instrument and premium to which they relate, traders are prone to losing them in multiple ways.
CFD trading provides an opportunity to trade in thousands of markets without requiring large amounts of capital.
However, you must know that CFD is a leveraged product and losses can exceed deposits. Considering the risks involved, you should gain thorough knowledge before you trade CFDs.
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