Fact checked
You may have heard of the term CFDs and have always wondered what they are, and how they work? Before you start your CFD trading journey it’s vital to understand exactly how CFDs work, and the implications of trading them. Once you understand exactly what CFDs are, you can then start looking for a broker to trade through.
Savvy can assist you to find the best CFD broker by helping you compare many of Australia’s leading CFD providers. Find out the minimum amounts required to start investing, compare commissions charged, and explore the range of CFDs on offer through leading brokers right here with Savvy.
Vantage CFD |
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Vantage CFD is an award-winning global broker which describes itself as a true electronic communication network (ECN) – offering services to trade CFDs on a wide range of products.More details |
eToro CFD |
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eToro is a comprehensive multi-asset broker which helped to pioneer copy trading, allowing novices to mirror the trades of more experienced and successful traders.More details |
IG CFD Trading |
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IG is one of Australia’s largest CFD providers with over 320,000 active trading customers world-wide. It’s award-winning trading platform and low commission rates make it Australia’s #1 online CFD broker.More details |
Disclaimer: Savvy is not advising or recommending any particular product to you. We provide general information on products for the purposes of comparison, but your personal situation or goals are not considered here. Although we try to make our comparisons as thorough as possible, we do not have information on all products on the market on our site.
You should always consult a given offer’s PDS or further documentation in the process of deciding on which CFD platform to choose, as well as seeking independent, professional advice. If you decide to apply with one of the platforms listed above via our website, you will not be dealing with Savvy; any applications or enquiries will be conducted directly with the platform offering that product.
A CFD, or contract for difference, is an agreement between a trader and a broker to buy and sell a contract for an asset, with the aim of making a profit on the trade. You enter an agreement with your broker to buy a contract based on the value of the asset, for a set agreed price. This is called opening a position.
When the price of that asset changes on the international money markets, you end or ‘close’ your position, and you either make or lose money based on the price difference between your buy and sell price. For example, if you buy one share for $10, and then sell it for $10.10c, you will make a profit of 10c.
The CFD can be based on the price of stock market shares, commodities, market indices or cryptocurrencies. It’s also possible to trade CFDs on foreign exchange pairs, although this is usually referred to as forex (foreign exchange) trading.
Therefore, a CFD is not a stand-alone asset in itself; rather it’s a form of derivative trading. A derivative is a security (a financial ‘product’) whose value is dependent on the value of the underlying asset (ie. the share or commodity on which the CFD is based.) For example, you can trade in share CFDs, which are a contract for difference based on the movement of a particular share market price. You could also decide to trade FX CFDs, which are a contract based on the price movement between two currencies.
CFD trading is a way of making money through buying and selling a contract based on the price of a named asset. When you open a CFD position, you can choose whether to make a ‘long’ trade or a ‘short’ trade. A long trade means you think the price of the asset will go up, whereas a short trade is a bet the price of the asset will go down.
Either way, if the price of the asset moves in the direction you’ve predicted, you’ll make money. However, if it goes in the wrong direction, you’ll lose money.
For example, you may think the price of Telstra shares will go up. You take a long position and buy 500 Telstra CFD shares at $3.90 per share. The price of Telstra shares then goes up to $3.95, so you decide to sell. You make a 5c gain on every Telstra share you have a CFD contract on, so you make a profit of 500 x 5c = $25. However, if the price of Telstra shares drops below your contract price of $3.95, you’ll lose 500 x every cent it goes down.
It is not possible to short trade every type of asset, and not all CFD brokers offer the option of making short trades. For this reason, it’s important to compare brokers through Savvy to find one that fits in with your trading style and aspirations.
As well as the ability to trade long or short, there are two distinct differences between trading standard assets and CFDs which you should be aware of. These are:
There are a wide variety of financial assets you can trade using CFDs. These include:
By comparing CFD providers through Savvy, you’ll be able to clearly see the difference between online brokers, and the products they offer. Find the one that suits the type of trading you wish to undertake, then get your trading started with Savvy today.
CFD trading is often likened to share trading on steroids – both the risks and the rewards are far larger than standard trading. It can be highly profitable, but it’s also a highly risky method of trading which is not suitable for beginners. It is most suited to:
CFD trading is not suitable for:
The risk with CFD trading is that because it is a leveraged product, you can lose far more than just your entire trading fund. If you gamble on pokie machines, you can only lose the money you put into the slot. However, with CFDs, you can end up owing your broker thousands of dollars more than your original trading fund.
There are two basic types of online CFD brokers – those who are market makers, and those offering direct market access (DMA) trading.
Market makers
These brokers offer an opportunity to trade CFDs based on bid and ask (buy and sell) prices they set themselves, and then offer to their clients. The prices on offer are based on the movement of prices in the international money markets, but they may not be identical. The broker sets their own values, and makes a profit from the difference in price between what they offer to clients, and what they can buy and sell on the real live international markets.
DMA (Direct market access) brokers
This type of broker offers direct access to the international finance markets through their platform, so the bid and offer prices you see are the actual prices of the asset as they are traded in real time on one particular market. For this reason, direct market access usually only applies to live CFD trading of assets on a particular market, for example the ASX or NYSE.
CFDs are usually a leveraged financial product, which means you don’t have to pay the full price of the assets you buy, but only a fraction of the full price. For example, if you buy $100 worth of shares on 10% margin, you will only have to pay the broker $10, but you will ‘own’ the right to the profit on the full $100 of shares. This is why CFDs are so popular with experienced traders, as they are able to take advantage of this leverage to make money.
The percentage of leverage on offer on a particular share or asset will vary, depending on a range of different factors including:
Shares that are heavily traded, for example, BHP or Telstra on the ASX, are offered with a smaller margin, which may range from 3% to 10% or more. Less popular shares which don’t have so many buy and sell orders (known as ‘illiquid’ shares) may come with a higher margin, for example, 40% to 60%.
It is essential to understand risk and reward ratios before trading any instrument on a margin, as leverage magnifies profits and losses dramatically.
Many traders get confused between trading long and short, and which way to trade in bull and bear markets.
Long trading – in a bull market
A market in which prices are rising is known as a bull market. It is helpful to remember this by picturing a bull tossing a matador UP into the air with its horns. In a bull market, there are more people wanting to buy shares than to sell them, so share prices rise. If this is the case, you will want to make a long trade, which means buying a CFD share at one price, waiting for it to go up, and then selling it for a profit.
Short trading – in a bear market
A bear market is the opposite to a bull market – prices are falling. You can remember this by picturing a large brown bear standing on its hind legs swiping DOWN to catch a fish. There are more people wanting to sell their shares than buy them, so prices fall. In a short trade, you sell the asset to your broker then buy it back at a lower price, and make a profit from that price difference. When you buy back the asset you end your CFD agreement, and you take your profit or loss. Even though you ‘buy’ the position back, you no longer have a position open, because it is offset by your original purchase.
The process to start trading CFDs is:
Choose between a market maker and direct market access (DMA)
Direct market access allows you to trade live price changes on whichever market you choose to trade. However, it does limit the instruments available to trade to just stocks and indices. Market makers can offer a wider range of products to trade, as the buy and sell prices they display are not live. Which type of broker is best for you will depend on your trading style and what type of trading you wish to undertake.
Look at the instruments on offer
Make sure the broker you choose offers your preferred financial instrument. For example, if you wish to trade US shares, make sure the broker you choose allows access to stocks listed on the New York Stock Exchange. If you want to trade Australian stocks, you’ll need a broker offering access to the ASX.
Compare commission fees
Some brokers offer CFD trading on a commission basis, based on a percentage of your trade value (for example, 0.5% up to 2% or more.) Others offer CFD trading for a set price per trade (for example, $5 – $9 per trade.) Brokers who are market makers often don’t charge a commission at all, as they make their money from the margin they add onto the prices they offer to buy and sell shares.
Try out trading platforms using demo accounts
Online trading brokers offer a variety of platforms to execute your trades. WebIress, MetaTrader 4 and MetaTrader 5 are some of the most popular trading platforms, which allow you to log into your trading account to buy and sell CFDs. Other large banks and brokers have their own trading platforms. Many offer a free trial demo account, so get experience of several trading platforms and try them out before making your final choice.
Compare the charting tools provided
The more charting tools provided, the better. Look for charting programs which allow you to quicky switch timeframes, say from daily price movement to weekly, monthly and yearly. The ability to draw charting patterns is also very useful. Compare how many charts the program will allow you to have open at one time – the more the better.
If you are live trading CFDs, it’s possible to trade almost 24/7 due to the world time zone differences between the various stock market opening hours.
CFDs are offered to trade on a wide range of financial products, so whether you wish to trade shares, forex or commodities, there’s a lot of choice of products to choose from.
The biggest difference between standard trading and CFD trading is the use of leverage, which can magnify your profits (and losses) by a large factor.
Share CFDs enable you to trade either a rising or a falling market, and take advantage of the price movement either up or down. The ability to trade both long and short is unique to CFDs and can be a valuable hedging strategy for market traders.
Unlike trading shares, when you trade CFDs there is usually no waiting time for your sales profits to be cleared through a bank – you receive your profits immediately in real time with no delays.
CFD trading comes with a very high risk of losing money. Some studies have shown that up to 8 in 10 CFD traders lose money.
Trading CFDs should only be undertaken by experienced traders who understand how to manage risk, and have a thorough understanding of the financial markets and how they work.
CFD trading involves overnight holding fees if you wish to keep a position open overnight, so it is more suitable for day traders and is not suitable for those wishing to ‘set and forget’ their investment.
You don’t own the underlying asset
Unlike investing in shares (when you become a shareholder), you do not own the underlying asset you ‘buy’ when trading CFDs.
Lose more than your trading money
Because most (but not all) CFDs are based on using leverage, you can end up losing far more than your initial trading funds, which is why CFD trading is not suitable for novice traders.
Trading CFDs is not the type of trading to be undertaken by inexperienced traders, so do your research, read trading books, and possibly attend a CFD trading education course before deciding to start trading CFDs. When you do begin trading, start small by buying just a handful of shares until you gain experience of how to trade CFDs successfully.
Having a trading plan is essential if you wish to start trading CFDs. The plan will outline what you have chosen to trade, your trading method and style, and how you will manage the risk of CFD trading.
The biggest mistake made by all traders worldwide is not getting out of losing trades quickly enough. Never trade without a stop loss order in place, and get out quickly if your trade goes against you.
The broker you choose should fit in with the type of trading you wish to do and your personal trading style. Compare online brokers with Savvy to find one that offers the products you wish to trade and fits in with your personal trading preferences.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
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