Contract for differences or CFD trading is a popular form of financial derivatives that allows you to trade an asset without actually buying or selling it. Trading CFDs in Australia is legal as long as you trade with a licensed broker. Find out how a CFD trader makes a profit or a loss as the price of an asset is changed.
What is CFD Trading?
CFD stands for “contract for difference” and it is a financial derivative or an instrument that you can buy or sell. Other examples of a financial derivative would include futures or options. Hence to explain the meaning of CFD we need to define a financial derivative. A financial derivative is a contract or a mutual obligation on a certain action in regard to a certain traded asset. The asset in its turn can be anything that is traded on global financial markets: shares, bonds, commodities, government obligations and even other derivatives. Therefore, to define CFD we need to break it down to the action and to the asset. Usually, CFD is explained as a call for a rising or a falling price of a stock market share and as the result a CFD trader makes or loses money depending whether he made the right call.
Basically, CFDs are bets on the prediction on the rise or on the fall of a chosen share. If the price of a share goes as predicted – welcome to the winners’ club!
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Best CFD Trading Platform Australia
Here at Getfirstep we constantly monitor the CFD-trading market to provide you with the list of all CFD brokers available to Australians. We evaluate Australian trading platforms based on things like number and variety of trading instruments, available brokerage services and customer feedback. Then we move these cfd providers up and down the list according to our findings and the rating system that we let them go through. Below please find our latest list of best CFD trading platforms with short brand descriptions for your convenience.
IC Markets“IC Markets” is a world leader when it comes to the variety and number of financial markets you can trade. Over 500 thousand trades are made daily with “IC Markets” with over 230 financial instruments. It is a strong, reliable and a very well-known brand in Australia and it wouldn’t be at top 1 position on our list otherwise. “IC Markets” is the best option for both those looking for “all-in-one-place” to trade and those looking for a top CFD broker.
Platforms: cTrader desktop, cTrader web, Mirror Trader, ZuluTrade, MT4 Dekstop, MT4 Web, MT5 Desktop, MT5 Web | Regulations: ASIC, CYSEC, Offshore | Minimum Deposit: 0
Pepperstone“Pepperstone” holds completive advantages over other brands by holding a “Best Forex ECN Broker” award issued by the UK Forex Awards in 2018. Apart from a smaller number of trading financial instruments there isn’t any reason why it wouldn’t be on the top of our list. “Pepperstone” provides a high-quality CFD brokering service in Australia and gets best reviews in Australian trading community.
Platforms: cTrader desktop, cTrader web, ZuluTrade, MT4 Dekstop, MT4 Web, MT5 Desktop, MT5 Web, MAC Platforms | Regulations: FCA, MIFID-ESMA, ASIC, DFSA, CYSEC, Offshore | Minimum Deposit: 0
Plus500“Plus500” is what comes to mind when we think of #1 CFD broker in the world. A primary sponsor of the Brumbies Rugby team, “Plus500” is available on any device in almost any country, including Australia. This brand claims to have the most convenient trading app which can definitely be considered very popular among Australian CFD traders. “Plus500” is a great all-around choice as a trading platform.
Platforms: Proprietary Web Platform | Regulations: MAS, FCA, MIFID-ESMA, ASIC, FMA, CYSEC, ISA, Offshore | Minimum Deposit: 100
If you haven’t found a brokers’ name you were looking for in the list above that means that Australia is among the restricted territories where this brand cannot operate or we found the brand to be unreliable and thus it didn’t make it to our list. We update information on a daily basis based on a market analysis provided to us by our affiliated professional traders. We also keep in touch with all listed CFD brokers to make sure that our reader are prone to all of their latest promotions.
CFD Trading vs Shares Trading: What Are the Differences?
They are two completely different things but both are traded on financial markets. Trading CFDs and shares is done through the services of a licensed brokers.
CFD vs stock shares trading comparison as follows:
- When you buy a CFD you do not enter a legal contract of ownership of a share (or shares) that are associated with a CFD trading. When you buy a share, you become a shareholder of the company who has issued the share.
- With CFD trading you can open both a long and a short position, or in other words you can benefit from prices going both ways – up and down, whereas when you trade stock shares you can expect to make profits only with increasing stock prices or paid dividends minus the commission of a broker.
- CFDs are traded with a leverage (or a margin loan), making it possible to enter high-payout deals with small deposits. On the contrary, shares trading requires paying a full amount of the market price at the instant of purchase.
- CFD trading is not limited to equity markets. The range of markets where CFDs are traded is broad and includes all global financial markets, including equities, commodities and bonds.
- CFD trading takes place 24/7, stock shares are traded when stock markets are open (usually from 9am to 9pm Monday-Friday).
CFD Trading vs Options Trading
CFD trading and options trading have similarities such as the fact that both of them are derived from shares trading. And apart from that there is not a lot more to say about their similarities, so let’s look at how they differ from one another.
Options trading requires high analytical and financial skills and we are only going talk about basics without going into too much detail about how it’s done. Option trading involves simultaneous trading of options and sometimes also other derivatives. Each traded option has its value determined based on multiple things, including the current share price, the date of the option’s expiry and the estimated volatility of the share price until the option can be exercised.
Unlike with CFDs, there are 2 types of options: call options and put options (or puts). The former gives the right, or in other words the possibility, or in other words the “option”, to purchase a particular stock at a defined price called a “strike price”. The later, on the contrary, is the option to sell a particular stock a “strike price”. Here is how a single call option works:
- The current stock price of a single “Apples and Oranges Inc.” share is 100 AUD.
- Olivia makes a call option, or buys a right to buy one share of “Apples and Oranges Inc.” with an expiry period of 1 year and a strike price of 110 AUD.
Then 1 year passes and there are possible outcomes:
|The stock price goes up||The stock price goes down|
|The stock price of a single “Apples and Oranges Inc.” share increases and becomes 120 AUD.Olivia decides to exercise the option she has bought a year ago and buys one share of “Apples and Oranges Inc.” for 110 AUD while its current market price is 120 AUD. |
In this case Olivia makes a profit of 10 AUD as a difference between the option’s strike price and the current stock price.
|The stock price of a single “Apples and Oranges Inc.” share falls down and becomes 100 AUD.Olivia decides not to exercise the option she has bought a year ago because the current market price is lower than the option’s strike price. |
In this case Olivia doesn’t exercise the option she has called for and doesn’t make any profit. In fact, Olivia loses money in commissions and fees she had to pay when making a call option.
When you trade only one option everything is pretty straightforward. However, to be successful in options trading one has to make multiple complex simultaneous trades with options on various different stocks. There is even more to it as you dig deeper in learning about different types of options you can trade, such as barrier options or binary options. Anyways it should be quite clear now that options trading is very different from CFD trading, especially in terms of its complexity. If you understand the CFD vs options trading then the next bit will be intuitively straightforward.
CFD Trading vs Futures Trading
Both CFD trading and futures trading are a popular form of buying and selling assets in various financial markets, including bonds, commodities, shares and forex. However, CFD trading is quite different from futures trading in its very nature and in traders’ intent. As you should be already familiar with how CFD trading works below we will tackle the futures trading in more detail.
Futures trading, unlike CFD trading, is usually undergone to hedge future risks of rising prices on various financial assets, mostly so on the rising prices of commodities. Futures is a form of a financial contract that obliges to buy or to sell an asset at a defined price level at a certain time in future. For example, a large agricultural corporation might decide to hedge some of its risks by knowing for sure a price for corn in the upcoming year. Hence this corporation decides to buy futures for corn thus creating an obligation for itself to buy a commodity for a certain price and at a certain time in future. The seller of the corn futures is in its turn has an obligation to sell the commodity for the price and at the time stated in the futures contract.
Futures trading can also be explained when compared to options trading. With options traders decide whether they want to exercise them on the date of expiry or not, so buying an option is like buying a right. Whilst in the case with futures trading, traders have no choice but to abide the obligation to buy or to sell an asset at the time defined in the contract. Comparing CFDs vs futures trading leads to a conclusion that they are both financial derivatives but CFDs are traded to make profit on predicting where the market will go and futures are usually traded to hedge against cases where the market goes up or down. Besides, CFDs are common in many financial markets, including the market for futures trading. CFD futures trading works in the same way as CFD trading in stock markets.
Comparing CFDs vs futures trading leads to a conclusion that they are both financial derivatives but CFDs are traded to make profit on predicting where the market will go and futures are usually traded to hedge against cases where the market goes up or down. Besides, CFDs are common in many financial markets, including the market for futures trading. CFD futures trading works in the same way as CFD trading in stock markets.
How Does CFD Trading Work?
Contracts for Differences (CFDs) is one of the most innovative trading tools and its popularity in Australia grows by the year. CFDs allow you to bet on increasing or decreasing prices on any financial market: currencies (e.x. Forex), stocks (Apple, Tesla, Google, etc.), commodities (oil, gold, corn, etc.) or indices (stock market indexes e.x. S&P 500 Index). When trading CFDs you make a contract with a CFD broker and you can make money (or lose them) without owning the underlying asset.
So this is how CFDs work:
If you thing the price of an asset, let say a price of Apple stock shares, is going to increase you can buy a CFD and benefit on that rise. This is also referred to “going long” or “opening a long position”.
- Buying = Expecting to make profit on rising prices = Opening a long position
However, when trading CFDs you can also benefit on falling prices if you sell CFDs or in other words “go short”.
- Selling = Expecting to make profit on falling prices = Opening a short position
The profit or loss of a single CFD trade in both cases, i.e. “going long” and “going short”, is equal to the difference in the price of an asset.
Let’s say the current price of an asset is $587. The market for can go two ways: the price might go up and down. Let’s see how you can make profit trading CFDs with both rising and falling asset prices:
- You have bought 10 CFD for $587 with a leverage of 1:100 and closed it when the price was $595. Then your profit is number of CFDs x the price difference x the leverage.
10 x $8 x 100 = $8 000.
- You have sold 1000 CFD for $587 with a leverage of 1:100 and closed it when the price was $583. Similarly, your profit is number of CFDs x the price difference x the leverage.
10 x $4 x 100 = $4 000.
In both of these scenarios you have entered a market when the price of an asset was $587. If you bet correctly on how the price is going to change you can make profit buying or selling CFDs.
When we calculated profits above you might have noticed that we had to account for the leverage. Leverage is something you can benefit from when trading CFDs. We will cover the leverage effect concept further down, so keep on reading!
Please note that other costs also have to be accounted for when calculating profits or loses:
- Spread (Broker’s commission for making a transaction)
- Overnight financing (doesn’t apply if you open and close your position the same day)
- Inactivity fees (applies to inactive funds over long periods of time)
- Withdrawal fees (check withdrawal fees with your bank)
What is Leverage in CFD trading?
When buying CFDs you don’t have to pay the full price of your position, but only a fraction of it. This practice is called a “trading with a leverage” or “trading on margin”. This allows traders to open more positions than they initially could with their budget.
Here how leverage effect works on our previous example: let’s say the current asset price is $587 and you expect it to rise in the near future. So you buy 10 CFD and the asset has a margin rate of 1 to 100, or 1%. 1% margin rate means that you only need to pay 1% of the whole price to open a long position, or similarly you only have to sell 1% of the whole price to open a short position.
- 10 CFDs = 10 x $587 = $5870 is the whole price
- With a leverage or margin rate of 1% you only have to pay 1% x $5870 = $58.7
In a situation when you have bet correctly, bought 10 CFDs and the price of an asset rises as you planned you make a profit which is equal to the number of CFDs x the price difference x the leverage. With a $8 price increase your profit is 10 x $8 x 100 = $8 000.
In a situation when you have bet correctly, sold 10 CFDs and the price of an asset falls down as you planned you make a profit which is equal to the number of CFDs x the price difference x the leverage. With a $4 price decrease your profit is 10 x $4 x 100 = $4 000.
There is of course a downside to a leverage effect because just like you can expect to have a higher return on your investment there is a substantial risk involved. When the position moves against you the opposite side of the leverage effect impacts your losses. You can expect to have high percentage losses when trading CFDs if the price of the underlying asset goes another way.