ASX

So What Are CFD's or Contract For Differences And How Do they Work?

Ok well first off CFD is the abbreviated version for Contract For Difference which put simply means when you open a CFD trade you open a contract for the difference. So if you open your position at $1 and close your position at $2, the difference is obviously $1 which you would receive the proceeds of, as per the contract...

Traders of CFD's can usually trade shares on their local exchange but they can often also trade global markets. They can also often trade commodities and and index's. It all just depends on the CFD trading company you are with.

Cfd's are actually a type of derivative and therefore you don't actually trade the physical share, rather you trade an a mirrored exchange which mirrors the underlying share price.

Eg. For example, instead of purchasing 1,000 shares of Telstra from a stock broker, a client could instead buy a CFD on Telstra on a CFD trading platform. A $5 per share rise in the price of Telstra would confer to the client a $5,000 profit, just as if he had purchased the actual shares that are traded on the exchange.

Another advantage of Cfd's is the ability to quite easily go short on a stock. So you can therefore also make money when the price of a share falls.

However one of the biggest advantages and the main reason most people trade cfd's is the huge leveraging power they have. These days allot of CFD providers only require a 5% deposit when a CFD is opened.

So to open a $100 000 position on Telstra only a $5000 deposit is necessary. There is also normally some allowance needed for interest payments.

One of the premiere CFD trading providers in Australia is IG Markets. Click on the banner below to go to their website.