What is a CFD and how can you make money trading in CFDs in Australia? In the simplest terms, a contract of difference refers to an agreement that another party will pay you- the buyer- any difference in price movements in the period between the start and end of the contract. CFDs trading is venture in Australia but few understand it.
Among other things, this article explains how CFDs work in Australia, where you can trade in CFDs and how you can make a good profit from CFDs. That said, CFDs can be confusing to novice traders and therefore need a bit more patience to learn to get results.
What Are CFDs In Trading?
Contract of difference trading is a very popular form of derivative trading. Being a derivate, a CFDs value in any contract is based on the price of an underlying financial asset. For instance, there are CFDs on current stock prices in exchanges across the world. CFDs are unique in that you enter a contract that stipulates the following:
You are not purchasing any asset and will not have any asset.
You will pay the seller the difference between the price of the underlying asset when you decide to offload the contract or when the contract period lapses.
Let’s take an example of a single CFD trade involving stock trading at $SG 800 in the market. Should you buy the contract and the stock price moves to $SG 830 by the time you are selling the CFD or when it lapses, the seller will pay you $SG 30 minus commissions. On the other hand, if the underlying stock moves to $SG 700 by the time you want to sell or when the contract lapses, then you will have made a loss and will have to pay for the difference.
Why CFD Trading Is Profitable
As with any derivative market, CFD trading has the potential to make a lot of money for short term speculators should the underlying assets’ price movements favor them. The margins set on CFD trades are equally high given the amount of risk associated with CFDs and what the brokers have to gain.
CFD trading is therefore quite popular among short-term speculators and those who have a solid understanding of the asset they are basing the CFD trades on. More importantly, having a CFD contract as opposed to buying a trading asset allows you and the broker to keep the money on the trade for as long as you want.
For instance, you could enter into a big CFD contract and ride through the upward and downward movements of a stock as the broker compensates you or deducts your balance based on the movement in the underlying asset. That said, CFDs are typically not good for long-term investments as it can get expensive given the levies and other considerations that are out of the trader’s control.
How Do You Trade A Contract for Difference?
Entering a CFD trade is as easy as choosing the amount you want to put on a contract and the period. However, the exact requirements for trading CFDs may vary from broker to broker. You can look at this site if you want to learn more about entering a contract for difference trade with a licensed broker in Australia.
Is CFD Trading A Gamble?
While it might attract speculators and high-risk traders, CFD trading is not the same as gambling. You need to have a solid understanding of the underlying market if you want to succeed in CFD trading. With the right insights and a good strategy, you can make a good profit trading with CFDs. However, CFD trading requires some level of skill as compared to other markets.
Is CFD Trading Legal in Australia?
Yes, it’s legal to trade CFDs in Australia provided you are using an approved broker and operate within the Monetary Authority’s guidelines.