CFDs mean you can trade gold without having to buy a safe.
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Disclaimer: General information only. All forms of investments (and in particular, trading CFDs, commodities and forex) carry significant risk, including the risk of losing more than the invested amounts, market volatility and liquidity risks. Past performance is no guarantee of future results. Such activities are not suitable for most investors.
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.
What are CFDs?
A contract for difference (CFD) is a tradable instrument that tracks the price of an underlying asset.
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 draws of CFDs is that they can go both "long" or "short", meaning a trader can speculate on prices going up and down. 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.1
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When you invest in shares, you are actually buying the underlying asset. That is, you are buying a share of a company.
As a shareholder, you can benefit from the capital growth of the shares' value over time, receive dividends and may get voting rights in the company. When you sell your shares, you're selling the actual asset in that company.
But when you buy a share CFD, you do not own the shares, you're just buying a contract provided by the CFD provider. You're simply speculating on whether you think the share price will increase or decrease without ever owning or trading it. The same is true when you buy physical gold compared to trading gold CFDs. Think of it more like speculation on the asset's price.
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.
Trading CFDs also comes with much greater risk than trading shares. This is because CFDs use leverage, which is where you borrow funds to increase the size of your trade without having to provide all of the capital yourself. If the trade goes against you, you can lose more than your initial investment, something that that isn't possible with regular share trading.
Why do people trade CFDs?
There are a few main reasons you might want to trade CFDs:
CFDs allow you to speculate on thousands of financial products and global markets that you may otherwise be unable to access.
You can go long or short, hence you can profit (and also lose money) in both rising and falling markets.
You can hedge your portfolio. Hedging acts as insurance for the rest of your portfolio through CFDs.
You can usually access free demo accounts, as well as charts and trading tools through your broker.
CFD contracts don't necessarily have a fixed expiry date, meaning you can close out your position when you decide.
There are also many reason not to trade CFDs. Before signing up, check out some of the risks of CFD trading further down.
What are the risks?
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:
CFDs are complex. CFDs are very intricate and confusing products. Even if you have a general understanding of what a CFD is, this doesn't mean you're ready to start trading CFDs.
You can lose more than your initial capital. If you gamble on the pokies, the most money you can lose is the amount you put into the pokie machine. This is not the case with CFDs. If you lose a CFD trade, you can lose much more money than you started with, meaning you actually owe the CFD provider money, sometimes hundreds of thousands of dollars.
You don't own the underlying asset. When trading CFDs, all you own is the contract between you and the CFD provider. Therefore, you can't benefit from the capital growth of the underlying asset over the long term.
CFDs depend on how the market performs. Even though you don't own the underlying asset, CFDs are still affected by market conditions. This can increase risks even more in a volatile market.
Are CFDs right for beginners?
CFDs 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.
Are CFDs right for you?
CFDs are more suitable if:
You are an experienced trader.
You have a strong understanding of not only CFDs but many financial products and markets.
You possess a high tolerance to risk and are not at all risk-averse.
You can afford to lose quite a bit of money (it's not guaranteed that you will, but you need to be able to afford it if you do).
You have some level of legal expertise to understand the complexity of CFDs.
You are not interested in owning the underlying assets.
You understand the measures available to minimise your risk and are experienced using these tools, for example, stop-loss orders.
You have conducted plenty of research – trading CFDs is not a decision that should be taken lightly.
How to choose the best CFD trading platform
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:
Available markets. Does the broker offer forex, gold, silver, cryptocurrency, stock market indices, global stock CFDs and ASX 200 CFDs?
Direct share CFDs. Not all brokers offer CFD trading on shares. Those that do can charge an additional subscription fee to access them.
Currencies. If you're looking to trade forex, check whether your preferred pairings are being offered.
Commission fees. There's often a brokerage fee charged when trading stock and stock index CFDs, so check to make sure it's not too high. These brokers instead run off a spread model.
ASX live data. Does it charge a fee to access live stock market data from the ASX and other stock market indices?
Minimum opening balance. Some brokers require a high minimum opening balance before you start trading – consider trialling the demo version first if it has one.
Platforms and software. Which trading platforms does it offer and can you add on software or analytics tools such as PsyQuation?
Other types of trading. Do you also want to invest directly in shares, ETFs, forex or managed funds?
CFD regulation
In 2021, ASIC extended its product intervention order to impose limits on CFD trading for a further 5 years. This included measures to reduce leverage ratio limits and give negative balance protection, amongst others, and saw a 91% reduction in aggregate net losses by retail client accounts, according to ASIC.1 The order will next be reviewed in 2027.
Expert insight
"Look for a broker with both a mobile and desktop platform... A mobile app means you can place trades on the go and not miss out on any opportunities. Make sure the app is feature rich and easy to use. Many brokers have very simplified and restricted apps that don’t provide a good user experience. Go for a broker with a mobile platform as good as its desktop platform, and make sure they’re integrated!"
Tony Sycamore
IG market analyst
What's the different between forex and CFD trading?
Forex trading specifically involves trading the price movements between two currencies.
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 differences between trading forex directly or using forex CFDs is whether you hold the underlying currency, and the types of trading fees you may need to pay. While both forex and CFDs trade based on spreads, CFD trading may attract additional trading fees, including commissions and holding fees if you keep your position open overnight.
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.
Finder survey: What types of CFDs do Australians trade the most?
Response
Forex
40%
Global stocks
40%
Local stocks
26.67%
ETFs
23.33%
Indices
23.33%
Cryptocurrencies
20%
Commodities
3.33%
Source: Finder survey by Pure Profile of 1145 Australians, December 2023
DMA is the term used for electronic facilities, often provided by independent firms, that permit particular investors or financial firms to access liquidity to trade securities they want to buy or sell.
Typically, these authorised firms or investors are usually brokers, dealers and banks that act as market makers. Generally they're a broker or dealer holding a certain number of shares of a particular security (at its own risk) in order to facilitate trading in that security.
By using a DMA, the investor can manage its account and trade directly without the intermediation of brokers and dealers. This means that the trader can access the infrastructure of the sell side firms with lower costs and commission.
DMA has opened the door to the individual trader who wants to participate in CFDs themselves rather than handing the order and trade to brokers for trading. The individual trader now has the opportunity to bypass the middle man and send the trade directly to the execution desk to finalise and uphold the integrity of the trade.
The benefits you can get from DMA:
You can set your own trading goals and change them when you feel it is appropriate without wasting your time contacting a trading specialist.
You can take more or less risk depending on your past performance or on your trading skills and experience.
The electronic environment allows fast transactions and fewer price differences or discrepancies than you could experience if you placed an order with a broker or dealer.
Everything you do is based on your own decisions: You can use more or less liquidity and buy/sell only when it suits you.
It is a great resource for skilled and experienced traders. If you are a newbie, it's better to contact a trading specialist or financial adviser.
The cons of DMA:
If you are an inexperienced investor you could risk losing profits or even lose money as you might not be able to read trends in time.
If there's insufficient trading in the underlying market, you won't be able to open and close CFD positions.
There is a smaller offer range than with the market maker.
Disclaimer: General information only. All forms of investments (and in particular, trading CFDs, commodities and forex) carry significant risk, including the risk of losing more than the invested amounts, market volatility and liquidity risks. Past performance is no guarantee of future results. Such activities are not suitable for most investors.
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.
What is a market maker CFD?
This is a trading company that creates its own market and determines the price range for the underlying asset on which the CFDs may be traded. It creates both the buy and sell price for a financial instrument or a commodity. So if you buy a CFD over a particular asset you are a price taker (not a price maker as in DMA).
However, the prices do not differ from the market price of the underlying asset. This means you have to deal through a broker or a dealer and do not have access directly to the market as with DMA.
Pros
The assets gain more exposure as they reach a wider range of markets because of a higher degree of liquidity in the market.
If you are a newbie, you could get some advice from your broker or dealer on how to invest in these types of CFD.
Higher liquidity means that you can trade even if there's insufficient trading in the underlying market.
Cons
Higher brokerage and commission fees.
The risks are more or less the same as those of volatile markets.
You must accept the price of the trader (even when it sets a higher price than the market: the so-called extra margin or spread).
The broker has the right to re-quote the prices after submitting an order.
Frequently asked questions
Yes, it's legal to trade CFDs in Australia. However, in order to open a CFD trading account, you'll first need to prove you have the required knowledge by successfully answering a questionnaire or quiz.
Some of the underlying assets that you can trade CFDs on include Australian and international shares, indices, commodities, foreign exchange and treasuries.
Trading CFDs is definitely not recommended for casual or beginner investors. Because of the specialised knowledge required and high level of risk involved, this type of trading is best left to expert investors.
Traders are only required to invest a small percentage of the trade's value to open the CFD trade. This is known as the margin requirement, and can be as little as 5% of the full trade value or even less. You could think of this margin as the deposit.
For example, let's pretend you want to trade Woolworths shares via CFDs, which are hypothetically valued at $10 per CFD. You decide to buy 100 of these CFDs, so the value of the trade is $10,000. With a margin of 5%, you are only required to pay $500 to open the trade.
Even though you only put forward 5% of the value of the trade, you're entitled to benefit from 100% of the potential gains. This is what makes CFD trading attractive to so many people. Still, it's important to remember that because you're trading with leverage, the same applies if your trade was to lose. You'd be expected to pay the CFD provider for the entire loss, which could far exceed your initial 5% margin requirement. Plus, you could also be charged a commission on the trade by the CFD provider.
Wrong. Because you are trading with leverage, it's possible to end up losing significantly more than your initial investment amount.
The best way to find a good trading platform is to do plenty of research. As well as right here at Finder, you can find plenty of useful information on blogs, forums and the websites of individual providers. Examine the features and benefits each trading platform offers and open a demo account if possible to try before you buy.
While you can certainly learn useful information at a training seminar run by a reputable financial or training organisation, attending a course is by no means all you need to do to fully prepare you to trade CFDs.
No, CFD trading is risky and far from a steady investment option. If you're looking for safe and secure returns on your money, consider other investment opportunities.
ASX exchange-traded CFDs are CFDs that are listed on the ASX. These are no longer offered by the ASX as of 2 June 2014.
When you buy shares in a company, you are usually entitled to dividends. Although trading CFDs means you never actually purchase shares, you can still take advantage of some of the benefits of ownership. Your trading account will be credited with a certain amount of money that reflects the dividend amount an ordinary shareholder would receive when you buy a CFD. When you sell a CFD, your account will be debited a similar amount that will be paid to the counterparty.
No, there is no real minimum limit when you trade CFDs.
The exact process for buying and selling CFDs will vary depending on the trading platform you choose. Contact your trading platform operator for detailed information and instructions.
Yes there is, but this differs between trading platforms. A commonly quoted minimum limit is $5,000.
No, any income you make from trading CFDs will be considered taxable income in Australia and must be declared on your tax return.
If you're a non-resident trader, you only need to report the income you've earned within Australia. It's important to get a clear understanding of your tax residency status and its implications before you start trading CFDs.
CFD and share trading glossary
Ask or ask price. This is the price at which a CFD trader can open a sell position or close a buy position.
ASIC. This is the Australian Securities and Investment Commission.
Bid or bid price. This is the price at which a CFD trader can open a buy position or close a sell position.
CFD (contract for difference). This is a contract entered into by 2 parties who agree to exchange money according to the change in value of an underlying asset.
Contract currency. This is the currency in which a particular asset is traded.
Dealing. Dealing is when you open or close a CFD position.
Derivative. This is a financial instrument whose price is derived from an underlying asset.
Going long. This is when you open a buy position.
Going short. This is when you open a sell position.
Hedging. This is taking an opposite position to reduce the risk associated with an initial position.
Initial margin. This is the minimum initial amount of money a CFD trader must outlay to open a position.
Leverage. Leverage allows you to trade a larger-value asset than the worth of your initial investment. This is sometimes also referred to as gearing.
Open interest. This is the interest rate that applies to all CFD positions that are held open overnight.
Stop-loss. A stop-loss order can be placed when a CFD position is opened and is triggered when the price reaches a specified level. These orders are used to close out positions that have resulted in a loss and aim to prevent further loss.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Kylie Purcell is the senior investments editor and analyst at Finder. She has completed a Certificate of Securities and Managed Investments (RG146) and specialises in investment products including online brokers, robo-advisors, stocks and ETFs. See full bio
Kylie's expertise
Kylie has written 134 Finder guides across topics including:
Cameron Micallef was an investment and utilities writer for Finder. He previously worked on titles including Smart Property Investment, nestegg and Investor Daily, reporting across superannuation, property and investments. Cameron has a Bachelor of Communication and Media Studies/ Commerce from the University of Wollongong. Outside of work Cameron is passionate about all things sports and travel. See full bio
Cameron's expertise
Cameron has written 161 Finder guides across topics including:
CMC Markets provides online trading services to Australian customers who can enjoy low commissions and the features of an award-winning trading platform.
Plus500 Australia is a CFD trading service, which allows you to trade CFDs for a range of financial instruments including shares, EFTs and commodities. Read our review here.
Hi Mahen, all of the CFD brokers displayed on this page are regulated in Australia. You can sign up by clicking on the “Go to site” button on the table.
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How can I get an Australian CFD broker?
Hi Mahen, all of the CFD brokers displayed on this page are regulated in Australia. You can sign up by clicking on the “Go to site” button on the table.