A contract for difference (CFD) is a tradable instrument that tracks the price of an underlying asset. They are traded across multiple asset classes including foreign exchange, commodities, shares and cryptocurrencies.
Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.
CFDs are derivative contracts that can be used to speculate on the price movements of different assets including stocks, commodities, market indices, forex and cryptocurrencies.
Because CFDs are complex investment products that are typically paired with leverage, they're high-risk and best suited to experienced traders.
Instead of owning the asset itself, investors hold a contract that is attached to a specific asset. The contract stipulates that the buyer of the contract must pay the contract seller the difference between the current price of the asset and the price at the time the contract was sold.
One of the benefits of CFDs is that they can go both "long" or "short", meaning a trader can try to make a profit regardless of the direction of the market. For this reason, CFD trading often becomes more popular during times of market volatility, as traders seek to profit by "shorting" the market when it falls.
Despite their popularity, as many as 8 in 10 investors lose money when trading CFDs.
This guide offers a complete overview of CFDs, including how they are traded, some trading strategies and what risks are involved.
Enjoy cheap fees and incredibly quick order executions when you trade forex, commodities and crypto assets.
Disclaimer: Trading CFDs and forex on leverage is high-risk and losses could exceed your deposits.
There are a few main reasons you might want to trade CFDs:
There are also many reason not to trade CFDs. Before signing up, check out some of the risks of CFD trading further down.
The CFD broker you choose will depend on your trading style and what instruments or assets you prefer to use.
If you're looking for the best online platform or app for you, consider the following:
CFDs are extremely risky, complex products and are ideally only suited to very experienced financial traders. Here are some of the potential risks that you should know about before deciding if CFD trading is right for you:
Some of the most common markets you can access with CFDs are shares, indices, forex, bonds, cryptocurrencies and commodities like oil or gold.
If you want to trade CFDs, you need to fully understand how the CFD itself works as well as the underlying asset.
If you have no experience trading shares, for example, it's not a good idea to buy a shares CFD.
While CFDs and stocks are both used by traders, they're very different investment products.
When you purchase a stock, you're buying a small part of a business and are a part owner. As a shareholder, you get a number of perks including voting rights of the company and dividend payments.
On the other hand, CFDs are simply contracts tied to the performance of an underlying asset. That asset could be almost anything, from a stock to a currency pair or a commodity like gold. When you purchase a CFD, you never actually own the underlying asset. You've simply entered a contract that will deliver either a profit or loss depending on the asset's price movements.
This means if you purchase a share CFD, you wont get any of the perks that shareholders typically receive - because you are not a shareholder.
Where CFDs gain an advantage over traditional share owners is they can trade on the price movements in either direction. This means they can profit (and lose) from both a rising and falling share price.
If you're trading CFDs over shares you're also facing greater risks. This is because CFDs are normally paired with leverage. This means using borrowed funds to amplify both profits and losses. It also means that you can lose more than your initial investment, unlike when you purchase shares directly.
Forex trading involves trading one global currency against another in order to make a profit.
CFDs are contracts where you can trade any number of underlying assets, including forex. In Australia, most forex brokers are actually CFD brokers. With CFD forex brokers, you're not trading currencies directly, but trading contracts that speculate on the price movements of a currency pair.
The main difference between trading forex directly and CFDs on forex is how the price of an asset will change. When you're trading CFDs the price is largely determined by the underlying supply and demand of the currency. When you're trading via the forex market, the price will swing based on the fundamentals of the currency.
There's also the difference in the purpose of each market. Forex was originally created to help countries trade with each other. CFDs are not involved in international trade but instead are used by traders to gain a profit or hedge against losses.
Back to topCFDs are not recommended for beginners given they are riskier than traditional investment products and are complicated. This is especially the case when leverage is involved.
Instead, CFDs are more suited to experienced traders or those that are considered sophisticated investors.
If you're new to trading and want to learn, many brokers offer free demo accounts and educational resources. These can help you learn how the markets work as well as test your strategies prior to risking your own money.
CFDs are more suitable if:
While the majority of retail investors actually lose money, it is certainly possible to make money trading CFDs.
Like anything though, becoming a successful trader can take some time, as you will need to learn the basics, control your emotions and build up your trading skills. As such, you’re better off starting with a demo account. This way you can practice your trading without risking your capital.
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