CFD means Contract for Difference, this is an agreement that is made between a buyer and seller. This agreement is to make good the profit or loss between when the CFD was bought and when it was sold. CFDs are common in Australia as well as in the United Kingdom. Typically CFDs are offered over shares, indices and foreign exchange contracts.
CFDs were once known as SWAP contracts, this was in the early days in London. In 2001 CMC and IG Markets, two large spread betting firms made CFDs popular through actively marketing to retail investors. The popularity of CFDs grew quickly throughout London due to stamp duty exemptions.
In 2002 both CMC Markets and IG Markets opened offices in Australia and began to actively promote CFDs to Australian traders, the popularity of CFDs peaked in 2007. As a result of their popularity amongst Australian traders and investors many international CFD providers saw the potential in Australia and opened up offices. At present are over 13 CFD providers operating in Australia and an estimated 35,000 retail CFD traders.
The press has drawn CFDs to the spotlight in recent times as a result of investors loosing money due to the leveraged nature of the product. This combined with the recent collapse of Sonray Capital Markets has led to the Australian regulator paying close attention to CFDs. The regulators have been primarily interested as to how providers manage client money.
At present CFDs remain one of the most common financial products for retail traders in Australia, although unconfirmed it’s estimated that CFD volumes account for around 35% of ASX exchange turnover. As CFDs are an over the counter product it is difficult to confirm this number.
Like shares CFDs are mostly traded on-line over the internet. CFDs are primarily traded using platforms offered by the main CFD providers. Many of these platforms were originally developed to trade currencies but were quickly adapted to share CFDs.
CFD trading is popular amongst on-line share traders. Share trading is extremely popular in Australia, in fact on a per capita basis Australia has the highest proportion of share ownership in the world.
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.
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