A Contract for Difference or CFD is a contract made between a buyer and seller to make good the difference between the purchase price and sale price. CFDs are extremely popular in both the UK and Australia and are typically offered over shares, indices and forex.
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.
At the start of 2000 IG and CMC Markets decided to open offices up in Australia to promote their CFD products. CFDs became popular in 2007. Many international CFD providers noticed the uptake of CFDs in Australia and commenced operations. Presently there are 13 CFD providers operating in Australia and around 35,000 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.
CFDs are the most popular financial product in Australia. It is estimated that CFD volumes account for approximately 35% of the turnover on the ASX, however this is difficult to confirm as CFDs are an over-the-counter (OTC) product.
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.
Australia has the highest portion of share ownership in the word per capita as a result it is not surprising that many CFD traders also trade shares. The phenomenal growth in the share market in Australia has led to CFD trading becoming popular in the share trading community.
Before you run out and join the 35,000 CFD traders in Australia you must ensure that you’re completely aware of the risks involved in CFD trading. Like any leveraged financial product CFDs offer major benefits however these do not come without risk. You should make sure that prior to jumping into CFD trading you read the Product Disclosure Statement (PDS) available from your CFD provider that outlines the risks and benefits of buying and selling 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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