CFD stands for Contract for Difference, CFDs are a financial agreement made between a buyer and seller to make good the profit or loss incurred between when the CFD was purchased to when it was sold. CFDs are common in both Australia as well as the UK, they are mostly offered over indices, stocks and currencies.
CFDs were previously known as SWAP contracts. In the early part of 2001 both CMC Markets and IG Markets began actively marketing CFDs to retail investors, this made them popular in the retail community. In the space of a few years the popularity of CFDs grew mainly because of stamp duty exemptions.
In early 2002 both CMC and IG Markets opened offices in Australia and started to actively promote CFDs. The popularity of CFDs peaked in 2007 at which point many international CFD providers saw potential in the Australian market and opened offices Down Under. Currently there are over 13 active CFD providers and and estimated 35,000 CFD traders in Australia.
Recently CFDs have received much attention as a result of investors loosing money due to the leveraged nature of the product and market volatility. This negative publicity combined with the collapse of Sonray Capital Markets has led to increased scrutiny from ASIC, the Australian regulator. The scrutiny has primarily focused on how client money is managed.
Although unconfirmed it is estimated that CFDs account for around 35% of turnover on the ASX. Aside from traditional share trading this makes them the most popular financial product in Australia.
CFDs are mostly traded over the internet using a variety of trading platforms offered by the main CFD providers. Many of the CFD platforms used by CFD providers were originally developed for forex trading and later evolved into CFD trading platforms.
Australia has the highest portion of share ownership in the word per capita as a result it is not surprising that many CFD traders also trade shares. The phenomenal growth in the share market in Australia has led to CFD trading becoming popular in the share trading community.
It is important to note that before opening a CFD trading account you are aware of the the risks involved in trading CFDs. The gearing CFDs offer provides the potential to make money, however you should be aware that you could also loose money. CFD providers must issue Product Disclosure Statements explaining the benefits and risks of the product, it is important that you read this document before you start trading CFDs.
Want to find out more about CFDs, then visit Ben McGrath’s favourite site on how to build a successful CFD trading plan.