A CFD (contract for difference) is an agreement between a buyer and a seller to exchange the difference in value of a contract, between when the contract is opened and when it is closed. The difference is determined by reference to an 'underlying' instrument - such as a share. CFDs combine;
- Buying power (leverage) - with a low Initial Margin, you can gain much greater exposure from your funds. CFDs are leveraged instruments. This means that you are fully exposed to price movements of the ASX-listed CFD without having to pay the full price of the contract. Leverage creates the opportunity for greater gains and losses than a direct investment in the underlying instrument. It is therefore important to understand both the upside benefits as well as the downside risks.
- Simplicity - CFDs are easier to trade and understand than most other derivatives
- Trade rising and falling markets - with ASX-listed CFDs it is possible to trade from both the long and the short side. If you take a long (bought) position, you are anticipating a rise in the value of the underlying instrument and would a loss if the value fell. If you take a short (sold) position, you are anticipating a fall in the value of the underlying instrument. If the value actually rose, you would experience a loss. In contrast to shares, where a trader usually buys first and sells later, with an ASX-listed CFD it is possible to first go short (sell) to exploite falling prices and buy back later.
Types of ASX-listed CFDs