CFDs

Trade the financial markets with CFDs

What are Contracts for Difference?

Contracts for Difference (CFDs) offer investors and traders the benefits of currency trading, online commodity trading and trading shares without physically owning them. CFDs or spread betting are designed to mirror the performance of a commodity such as a barrel oil, shares in BHP, Japanese Yen or the FTSE100 index.

How do Contracts for Difference work?

You buy ‘exposure’ to a share, commodity, currency or index at the market price and your profit or loss is determined by the difference between the purchase price and the sale price. Unlike buying a share on the ASX, you do not actually own the stock, but you have the exposure to the gain or loss that the stock makes, while you have the CFD open.

What are the benefits of a CFD?

Because you do not actually buy the stock, you can purchase a Contract for Difference for a fraction of the price of the actual security. Often only 1% to 2% of the full purchase price is required. While this leverage can magnify your gains, it can also magnify your losses. The owner of a share Contract for Difference is also entitled to receive any cash dividends while they have a CFD open.

Hot tips:

Trade the market - Many CFD providers take the other side of your transaction, called 'market making'. We recommend finding a provider who does not make the market, and does not profit when you lose
Full service provider - Check that the service offers a full range of products, like commodities and foreign shares. Some of the smaller providers will not give you access to all the investment opportunities that are available
Questions to ask your CFD provider
- What is the margin requirement for the provider?
- Are you trading in the actual market, or is the market being made by the CFD provider?
- What are the transaction costs for trading?
- Is long and short trading available?
- Can you trade 24 hours a day (when international markets are open)?
- Do you receive interest when you take a short position?
- What interest rates are you charged on long positions?
- Can you participate in rights issues, share splits and other stock activities?
- Do you receive dividends on stocks in which you hold a long position?
- Can you place stop/loss orders?
- Is daily reporting available?
- Can you contact staff members on the phone if you are unsure about the position you are taking?

Watch out for:

Margin calls - Margin calls can happen at any time, day or night, if the market moves against you. It is extremely important to be aware of your position and how a margin call may affect you and your holding
Over gearing - It is very easy to over-gear your investments and get sold out by the system. This can result in your position being sold at the bottom of a temporary drop, and you missing out on the upside
Buy and forget - CFDs are not suitable for 'buy and forget' trading or long-term positions
Interest charges - If you hold long positions you have to pay interest charges every day
No underlying rights over the shares - As a CFD investor you have no rights over the underlying shares and cannot participate in company votes
Dividend payments - For an investor who opens a short CFD position, he is liable to pay out the full dividend value if he holds his short position over the record date
There is no such thing as ‘commission free dealing' - Companies are making good money providing these services and if you are getting commission free dealing, there will be inflated spreads to cover this
Do not use CFDs for open dated investments - Have a set time period and expected profit in mind, before opening a position

Anything else to know?

Caveat Emptor - Let the Buyer Beware

Money Owl’s top picks

IG Markets

Offers over 7000 worldwide shares, all the major currencies pairs, exotic currencies, world indices, commodities, options and even carbon emission futures. Overall the IG Markets offering is very strong and caters to all levels of CFD traders and investors.

Click here to go to IG Markets for more information or to open a CFD account

Other providers

eToro

Has designed a platform with the end user in mind and an intuitive interface. Spreads are available from 2 points, leverage is good and you can start with as little as $50 opening balance, eToro is a strong choice for those looking to trade currencies, but it lacks many of the other options from the other two CFD providers and system availability is not as good as the other two offerings.

Click here to go to eToro for more information or to open a CFD account

CMC Markets

Have an easy to use platform offering over 7,000 investments. The CMC Markets platform is known as ‘Market Maker’ and this means that CMC take the corresponding side to you transaction, i.e. if you lose, they win. Having the person who sets the rules, benefit when you lose, presents its own set of problems. CMC Markets offers a very smooth interface and excellent charting and data analysis.