In financial markets, one instrument stands out for its versatility and accessibility – CFDs. These financial derivatives have gained immense popularity in Australia, providing seasoned and novice traders a unique gateway to global markets.
This article will educate you on CFDs basics, their advantages and how to trade them effectively. Websites like https://www.vantagemarkets.com/en-au/academy/cfd-australia/ will also add to your knowledge of CFD trading.
CFDs Demystified: A Closer Look
CDF is a financial derivative that allows traders to speculate on the price movements of various assets without owning the underlying assets themselves. It is a contract between a trader and a CFD provider.
This contract is based on the price of an underlying asset. The trader agrees to pay the broker the difference between the asset’s price at the time of opening the CFD and its price at the time of closing the CFD. If the price moves in the trader’s favour, they profit; if it moves against them, they incur a loss.
Leverage allows traders to control a more substantial position with a relatively smaller capital. In Australia, CFDs are subject to regulations that dictate the maximum leverage that can be offered, often between 30:1 and 2:1. That allows traders to amplify their gains. Still, it also entails a higher level of risk.
Margin is the initial capital required to open and maintain a CFD position. A trader must maintain the margin necessary to keep the position open; if the account balance falls below this level, they may face a margin call. CFDs provide access to various asset classes, enabling traders to diversify their portfolios. They offer a versatile tool for speculating on the price movements of these assets.
The Advantages of CFD Trading
The CFD market is known for its unique advantages, making it an attractive choice for new and experienced traders.
Flexibility and Market Access
One of the standout features of CFD trading is its flexibility. Traders can go long (buy) or short (sell) on various assets, profiting from rising and falling markets. That is advantageous in turbulent market conditions, as traders can benefit from market downturns without owning the underlying asset. Traders also access global markets 24/7, allowing them to trade various asset classes across different time zones.
Australia offers unique tax benefits to CFD traders. Profits from CFD trading are considered a form of capital gain. Traders may be eligible for a 50% capital gains tax discount if the position is held for at least 12 months. Traders can offset their losses against their gains, reducing their tax liability. Consult a tax professional for personalized advice on taxation.
Risk Management Tools
CFD providers offer multiple risk management tools to assist traders in managing their positions. These tools include stop-loss and take-profit orders, guaranteed stop-loss orders (GSLO) and limit orders. These features empower traders to set predefined levels at which their positions will be automatically closed.
How to Trade CFDs Successfully in Australia
Education and Research
Before embarking on your trading journey, educate yourself about the financial markets and the specific assets you plan to trade. Various resources are available, such as online courses offered by industry experts. Staying informed about global economic events and market news is paramount for making informed trading decisions.
Choose a Reputable CFD Provider
Ensure that your chosen provider is licensed and compliant with ASIC regulations. Look for a provider that offers a user-friendly trading platform and competitive spreads. You should also consider the quality of customer support and the availability of educational resources.
Develop a Trading Plan
A well-defined trading plan is the cornerstone of successful trading. Your plan should outline your trading goals, risk tolerance and strategies. Set specific entry and exit points for your trades and manage your risk effectively. Risk management tools like stop-loss orders and guaranteed stop-loss orders can help protect your capital.
There are restrictions on the sale of CFDs to retail investors in Australia.
- apply ‘margin close-out protection’, to end one or more open CFDs before all or most of the investment is lost
- limit retail client losses by providing ‘negative balance protection’, so they can never lose more than they invest
They must not:
- exceed specific leverage ratio limits, depending on the CFD asset class
- offer incentives to trade CFDs, such as trading credits and rebates, or ‘free’ gifts like iPads
Read more about ASIC’s CFD Product Intervention Order.