Compare CFD (Contracts for difference)
What is a CFD?
A contract for difference or CFD, as it is commonly known, is a financial derivative that allows traders to speculate on the upward or downward movement in the value of a financial instrument – shares, indices, commodities or currencies.
According to ASIC, ‘CFDs are derivatives because their value is derived from the value of another asset, for example, a share, commodity or market index’.
Due to their complexity, CFDs aren’t suitable for everyone, so it’s worth considering your individual needs and circumstances and making sure you understand the risks involved before deciding to invest in them.
This video from the ASIC MoneySmart website provides insight to the types of risks that can be encountered when investing with CFDs.
How does a CFD work?
A CFD does not involve acquiring or owning the underlying asset that is the subject of the CFD. The CFD only refers to any change in value of the asset. The two parties who have entered into the contract stand to gain or lose depending on whether the value of the underlying asset increases or decreases. The gain or loss is the difference between the opening price and the closing price of the contract, multiplied by the number of underlying shares or other assets mentioned in the contract.
Where can I trade CFDs?
The table below is a list of Australian providers offering CFD trading.
Canstar does not rate these providers for CFD trading capability.
| Name | Minimum Opening Deposit | Major Trading Instruments | Commission (ASX 200 Shares) | Leverage – margin required | Link to provider website |
|---|---|---|---|---|---|
| IG Markets | $0 | Indices FX Shares Commodities Cryptocurrency ETPs |
0.10% with $7 minimum | From 0.5% – 5% | Visit website |
| CMC Markets | Forex Indices Cryptocurrencies Commodities Shares Treasuries |
From 0.10% or 2 cents per share for US/Canadian listed shares | From 0.2% to 25% | Visit website | |
| Saxo Capital Markets | AUD$3,000 | Indices FX Shares ETFs |
0.10% with $8 minimum | Up to 40x | Visit website |
| City Index | AUD$500 | Indices FX Shares ETFs Commodities |
0.08% with $5 minimum | From 0.5% | Visit website |
| TradeDirect365 | $0 | Indices FX Shares Commodities |
0.07% with $5 minimum | Up to 200:1 | Visit website |
| FP Markets | From $1000 | Indices FX Equities Commodities |
From 0.08% | 100:1 as standard | Forex Broker and CFD Provider – Australian Regulated |
| Plus500 | AUD$100 | Indices FX Shares Commodities Cryptocurrency ETFs |
No commission | Up to 300:1 | Visit website |
| Pepperstone | US$200 | Indices FX Commodities Cryptocurrency |
No commission | Up to 200:1 | Visit website |
Who is the contract with?
The two parties in a contract for difference are known as the buyer and the seller. CFDs are typically traded over the counter (OTC) and this means the contract is directly between the two parties without an exchange. However, clearing houses are often used to facilitate the transaction.
When does the contract end?
CFDs do not have an expiry date and can be closed by either party generally at any time. That said, as with many types of investing, there can be occassions when it is not possible to close out a position or sell down an asset.
Trading parcel size
You can typically purchase CFDs in multiples of 1000s, and each CFD has its own price. Typically, the cash outlay is 5% of the value of the CFD. Therefore, the calculation of your initial outlay in this case would be: CFD price x number purchased x 5%.
What is leverage?
For a small outlay of cash, a CFD allows a trader to access a far greater level of exposure to the gain or the loss.
Leverage allows traders to deal in assets with a value that is typically far greater than the cash amount required to put the deal in place. In the case of CFDs, the cash required to put in place the contract is generally only 5% of the value of the contract. As ASIC explains, “the reason the initial cash outlay is only 5% is that “you are effectively borrowing the other 95%”. E.g. if you’re going long, a 10% drop in share price would equate to a 200% loss for you (excluding fees, interest and any other charges).”
CFD strategies
Two core strategies are used by CFD traders. These are known as:
- ‘Going Long’ – let’s say for example, you believe Stock A will increase in value, you therefore want to buy a CFD for that stock. The counterparty to the contract is the seller and they believe Stock A will decrease in value.
- ‘Going Short’ – essentially the opposite of going long. If you believe a stock will fall in value you would sell a CFD to a buyer who believes the stock will increase.
At the end of the contract, depending on the movement of the market valuation of the underlying asset, one party will owe the difference to the other.
Risks
There are a number of different risks to consider when trading CFDs, such as market risk, liquidity risk and counterparty risk. To learn more about common investment risks like these, check out this article.
CFDs are dependent on conditions in the market for the underlying asset, even though you are not actually trading the underlying asset. ASIC also says that you should only consider trading CFDs if:
- you have extensive trading experience
- you are used to trading in volatile market conditions, and
- you can afford to lose all of, or more than (if you leverage your investment), the money you put in.