A Contract for Difference (CFD) is a financial derivative that allows traders to speculate on the price movements of various underlying assets without actually owning the assets themselves. Instead, the trader enters into a contract with a broker, and the difference in the asset's value between the opening and closing of the contract is settled in cash. This means that traders can profit from both rising and falling markets.

Here are the key features of CFDs:

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1. Underlying Assets: CFDs can be based on a wide range of underlying assets, including stocks, indices, commodities, currencies (forex), and more.

2. Leverage: CFDs often allow traders to use leverage, which means they can control a larger position size with a smaller amount of capital. While leverage can amplify potential profits, it also increases the risk of significant losses.

3. Speculation on Price Movements: Traders can go long (buy) if they anticipate that the price of the underlying asset will rise, or go short (sell) if they expect the price to fall. The profit or loss is determined by the difference between the opening and closing prices of the contract.

4. No Ownership of the Underlying Asset: Unlike traditional investing where you physically own the asset, with CFDs, you do not own the underlying asset. You are essentially making a contract with the broker to settle the difference in the asset's value.

5. Settled in Cash: At the end of the contract, the profit or loss is settled in cash. If the trader makes a profit, the broker pays them; if there's a loss, the trader pays the broker.

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CFDs are popular among traders for their flexibility and the ability to speculate on various markets with relatively small amounts of capital. However, it's crucial to be aware of the risks associated with leverage and the potential for rapid and substantial losses. Additionally, CFD trading is subject to regulations, and traders should be familiar with the rules and requirements in their jurisdiction.

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Speculate in Both Rising and Falling Markets

CFDs are derivatives based on an underlying instrument. There is no ownership of the underlying asset, however, they allow you to participate in the price movement of the asset. This means you can potentially profit in both rising and falling markets.

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In a rising market you would look to buy a CFD and then sell at a later date. This is called ‘going long’.

In a falling market you would look to sell a CFD position first and then buy it back at a later date closing out the position. This is known as ‘going short’.

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Efficient Use of Capital

CFDs are leveraged products enabling traders to increase their exposure to an underlying asset with a small initial outlay. When you open a trade you only need to deposit a small percentage of the value of the position and this is known as margin. Your margin will vary depending on the value of your CFD position. Leverage can result in added gains should the market move in your favor, however, it also carries risks and can result in increased losses should your position move against you.

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Hedging Other Investments

The ability ‘go long’ as well as ‘go short’ with CFDs means that they are a great tool for hedging an existing portfolio. They are a cost effective alternative to selling the portfolio prematurely and can be used to provide ‘insurance’ against adverse price movements.

For example, if you have a long-term portfolio that you wish to keep, however you are of the view that there is some short term risk to the value of the portfolio you could use CFDs to ‘hedge’ your positions. If the value of the portfolio falls the profit you make on the CFDs will offset the losses in your portfolio.

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Flexible Contract Sizes

The contract sizes of CFDs are often less than the typical contract size of the underlying instrument which means you can gain exposure to the price movement of the instrument without a significant deposit. Flexible sizing allows you to tailor your trading according to your risk management criteria.

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Access Global Financial Markets

CFDs allow traders access to a wide range of global markets that would otherwise be difficult to access. CFDs make it easy to trade CFDs on Commodities like Gold, Silver, Oil, as well as a variety of global indices without having to trade the futures contract itself

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Disadvantages

You should always consider your risk appetite and investment strategy prior to trading leveraged products. Leverage can work for you as well as against you and can magnify profits as well as losses. In the event of a significant move against you, you may lose more than your initial deposit. It is also important to be aware that you do not own the underlying instrument over which the CFD is based. Further information regarding the benefits and risks of CFD trading can be found in our Product Disclosure Statement.