Why trade CFDs?
CFD trading is a form of derivatives trading – meaning you deal on prices derived from the underlying market, not on the underlying market itself. It’s a popular form of trading because it enables traders to:
Here are the six steps you’ll need to follow to start CFD trading:
1. Make capital go further with leverage 2. Go short or long 3. Trade a huge range of markets 4. Mirror trading the underlying market 5. Hedge a share portfolio 6. Use DMAIf you’re new to contracts for difference, start with our introduction to CFD trading and how it works.
Leverage
CFDs enable your investment capital to go further, as you only have to deposit a fraction of your trade’s
full value to open a position. The deposit you’ll have to put down is called margin.
How much you’ll need to deposit depends on the size of your position, and the margin factor for your chosen
market.
So, if Commonwealth Bank has a margin factor of 5%, then your margin would be 5% of the total exposure of
your trade, whereby a position worth A$1000 (50 share CFDs x $20 per share CFD = $1000), may only require a
deposit of A$50.
However, it’s important to remember that your total profit or loss is based on the full size of your position, not your deposit.
| CFD trade | Traditional trade | |
| You deposit | A$50 | A$1000 |
| Your CBA position rises to A$1025 | You make A$25, or 50% | You make A$25, or 2.5% |
| Your CBA position falls to A$975 | You lose A$25, or 50% | You lose A$25, or 2.5% |
Going short
Because a CFD trade consists of an agreement to exchange the difference between the opening and closing
price of your position, it is more flexible than other forms of trading. This allows you to trade on markets
that are heading down as well as up.
When you trade CFDs on a dealing platform, you’ll see two prices listed: the buy price and the sell price.
You trade at the buy price if you think that the market is going to go up in price, and the sell price if
you think it is going to go down in price.
Trade a huge range of markets
You can use contracts for difference to trade over 17,000 markets, including shares, indices, commodities,
forex, cryptocurrencies, options and more. And you don’t have to access multiple platforms to trade
different markets. Everything is available under one login, wherever you need it – you can trade via your
web browser, your phone or your tablet.
You can even trade some markets outside of trading hours, to make the most of company announcements. Just
keep in mind that the market’s opening price may differ from its out-of-hours price.
Similarity to the underlying market
CFDs are designed to mimic the trading environment of their underlying market fairly closely. Buying an
Apple share CFD, for instance, is the equivalent of buying a single share in Apple – if you want to buy the
equivalent of 2000 Apple shares, you’d buy 2000 Apple share CFDs. However, when trading share CFDs, your
positions will be adjusted to offset the effect of any dividend payments and you won’t receive shareholder
privileges.
Buying or selling a forex CFD, meanwhile, is equivalent to buying a certain amount of base currency by
selling the equivalent amount of quote currency. So buying a single CFD on GBP/USD would give you the same
exposure as buying £100,000 in US dollars.
Hedging your share portfolio
Say, for instance, that you own a number of shares in HSBC, and you plan on holding your shares over the
long term. You believe that the banking sector may be in for a downturn, and you want to offset any
potential losses using CFDs. So you open a short position.
If you are correct and your HSBC shares drop in value, then your CFD position will earn you a profit,
offsetting your loss. If your HSBC shares increase in value, then you can close your CFD position – and
offset the loss you incurred against future profits for CGT purposes.
DMA
If you’re an advanced trader, you can get direct market access (DMA). This enables you to see and interact
with the order books of stock exchanges and forex providers. Instead of trading at the buy and sell prices
offered by famous worldwide trading, you can see all the available bid and offer prices at any given time, and trade
at market prices you choose.
When you choose to trade using DMA, there’s no famous worldwide trading spread to pay – instead, DMA trades are
charged via commission. While it can be a powerful tool, there’s no guarantee that you’ll find prices that
are better than the prices we offer, and it’s only recommended for experienced traders.
FAQ
Most CFD trades are open ended – with some exceptions such as futures and forwards. When you want to close your position you simply place a trade in the opposite direction to the one that opened it.