Trading CFDs

A Contract for Difference, or CFD, is one of Australia's fastest growing trade areas and is exactly what the name suggests. A CFD is a contract where the buyer and seller of any stock agree to settle the difference between the opening and closing value of that stock. The exchange of the value difference generally occurs on a daily basis.

Advantages of trading CFDs

There are many advantages to trading CFDs over trading shares:

• CFDs give greater exposure to the market at a low margin
• They are simpler to use than shares and are easier to understand
• CFDs are leveraged which means you get full market exposure to price fluctuations but do not have to pay the full security price
• You can sell securities and buy them back at a later date. This is referred to as short selling.

Trading CFDs on the Australian Securities Exchange (ASX)

If you decide to trade CFDs that are on the ASX, there are further advantages:

• All prices are fully transparent and identity remains anonymous, which minimises the impact of markets
• The ASX is independent, has no position in the trade and offers a first person price/time priority
• Any risk from other parties falls to the Sydney Futures Exchange Clearing Corporation (SFECC); they guarantee trade performance
• For further peace of mind, the SFECC processes are scrutinised by the Reserve and the Australian Securities Investment Commission (ASIC). The ASX has more information about trading CFDs.

Disadvantages

• While CFDs give you more exposure and reduce your financial risk, they are not always governed in the same stringent manner as when trading shares
• You probably will not be able to make significant gains like you would in share trading because you are only trading the difference between opening and closing values not the full share price.