The Pit - IMI Trust

Contracts For Difference, or CFDs as they are known, have had a major impact in the Australian trading and investment landscape.  Just 3 years ago they were virtually unheard of and today they are the most heavily traded derivative in Australia.

Why the phenomonal rise in CFD trading? Why are education providers ready to give their left elbow to teach people how do trade CFDs

Firstly, we have jumped the gun.  Apologies.  Most of you out there probably are keen on managed funds or just trade shares (that’s uncool nowadays by the way) so you may not know what CFDs are.

A contract for difference is a contract between two parties, buyer and seller, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. Thank you Wikipedia for that accurate CFD definition. 

It still may have not made any sense to you but here are some reasons why CFD trading in Australia has become popular…

1. CFDs are a leveraged trading instrument. As an example, for a $10,000 trade, the margin required is usually $1000 (10%). Some companies offer margin rates as low as 3% on Stock CFDs
2. CFD pricing movements are tied to the share price. This means if the share price is worth $10 and it increase to $10.10 (a 1% movement), you actually experienced a 10% growth on your margin invested. A CFD is not like an option, where the price of the option is NOT directly tied to the movements of the stock price. Obviously this is also reflected on the downside of a CFD movement.  (Special Note To Optimistic Traders:  CFDs Do Have A Downside.  Yes, They Really Do)
3. You also receive the dividends on the total investment, not just the portion of the holding you own. 
4. CFDs offer traders the opportunity to place Long CFD trades or Short CFD trades. So you can profit from rising or falling share prices. (Special Note To Optimistic Traders:  You Still Have To Position Yourself Correctly And The Market Must Respond Accordingly For You To Profit.  Making A Profit In A Falling Market Is Not A Right)
5. Trade Indices CFDs are available.  This means you can take advantage of the movements and stability of indices such as the ASX 200, Dow Jones Index, Nasdaq and S&P 500.
6. Margin is comparatively priced. The interest rate on the capital borrowed (the other 90% of the stock you don’t own) is relatively inexpensive and comparable to real estate loans.
7. Trading CFDs internationally has been made a lot easier with online trading platforms offering traders and investors international Stock CFDs. Some platforms make the process complex. Other online trading platforms like the SMC Trader, make international CFD trading as simple as trading Australian Stock CFDs.  We know.  We designed the support system that ensures you can trade CFDs in under a minute.
8. Americans can’t trade them. Sorry Americans!
9. Ability to hedge current stock holdings. Some CFD Traders, have used CFDs to hedge their stock holding in times of uncertainty, or when Alan Greenspan is talking (Sorry? What’s that Mr Greenspan? You did what?)

I hope this provides you with some more information about CFDs. Recent estimates of online trading in the UK show that 50% of all trading are CFD trades. With CFDs representing such a small segment of the Australian market, industry experts forecast more volume traded on CFDs in the upcoming months.  As the returns offered can be so attractive, CFDs seem like they are here to stay but traders should tread carefully.  Downsides can be painful is your CFD isn’t adequately hedged.  Did you hear us Optimistic Traders?!!?