Best Cfd Trading Platform Australia – Updated: May 19, 2022 Fact Check This article was checked to present the most accurate information at the time of writing.
CFD trading in the online investment space is full of financial terms that can seem a bit confusing to the untrained eye. At the fore is the multi-billion pound CFD space.
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At its simplest, CFDs allow you to invest without owning the asset. Instead, you are simply speculating on the future value of the asset.
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Do you want to know what CFDs are and why you should consider including them in your long-term investment goals? If so, read our complete guide to CFD trading. Inside, we explain what CFDs are, how they work, what they allow you to trade, and more.
Note: CFDs are a highly speculative asset class. Make sure you understand the key risks before trading.
A contract for difference or simply “CFD” is a financial instrument that allows you to trade an asset or group of assets without owning them. Instead, you simply assume that the value of the asset will go up or down. CFDs are a very useful trading tool because they can represent almost any asset class.
For example, let’s say you want to trade gold. In a traditional sense, physically buying and storing gold for profit would be a logistical nightmare. This also applies to other tangible assets such as oil and natural gas. That said, it covers the CFD space
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Whether it’s stocks and shares, ETFs, futures, options, cryptocurrencies, energies, interest rates or indices, you can find CFDs. Even if you don’t own the underlying asset, for example, CFDs allow you to trade the asset in exactly the same way.
For example, let’s say you want to invest in the S&P 500. For those who don’t know, the S&P 500 is a stock index that tracks the 500 largest companies listed on the NYSE and NASDAQ. Instead of buying 500 shares individually, you can buy one CFD. Depending on how the markets are doing, you’ll make a profit or a loss when the S&P 500 changes.
Trading CFDs is very simple once you know what you are doing. This is because CFDs work like any other trading tool. In other words, once you’ve decided how you think your chosen asset will move in the markets, you simply need to place the trade and determine where your exit point is.
Short term. Since you’re only looking to trade in the short term, it doesn’t make sense to buy stocks in the traditional sense. By doing this, you will face huge fees for not actually using the trade. Instead, you decide to buy HSBC shares in the form of a CFD.
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Basically, you were able to earn on the future value of HSBC without owning the shares. Instead, you just traded CFDs.
In this example, you decided that the fat would be “short”. This means you believe oil prices will fall. Shorting is one of the most interesting aspects of CFDs, as they allow you to profit even when markets are down. The short selling process works in the same way as the previous example, albeit in reverse.
Simply put, if you can trade an asset in traditional financial markets, you can be pretty sure that CFDs exist. The main reason for this is that CFDs simply track the real price of an asset. For example, if the price of gold in the world market increases by 3%, the CFD on gold will also increase by 3%.
To participate in CFD trading, you must use an online broker. We’ll cover the details of how to choose a CFD broker later in our guide, but it’s important to research what trading fees you should be aware of.
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First, CFD brokers are focused on making money. Therefore, you may have to pay a trading fee every time you buy or sell a CFD. If you do, you will be charged as a percentage of the amount exchanged.
For example, let’s say you bought a CFD for £1,000 and the broker pays 1%. This means you have to pay a £10 fee. In addition, you will have to pay a commission when you decide to sell CFDs. Therefore, if you sell the same CFDs when they cost £1,500, you will pay £15 in commission.
Beginner traders often overlook spreads, especially when using a broker that offers commission-free trading. However, the spread is the trading fee you pay indirectly. In its most basic form, the spread is the difference between the “buy” price and the “sell” price.
For example, let’s say you’re looking to sell natural gas. If the buy price is $51 and the sell price is $50, this represents a 2% spread. Therefore, you should see at least a 2% increase in the value of your trades. This is why you should choose a CFD broker that offers super tight spreads.
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If you plan to trade leveraged CFDs, you should also consider overnight financing. Simply put, when you buy or sell a leveraged CFD, you are actually borrowing money from the broker in question. This is because the broker allows you to trade with more money than you have in your account.
Thus, overnight CFD financing works in the same way as a loan. If you keep a position open for more than 24 hours, you will pay a small percentage of interest. Leverage plays a very important role in CFD, so we will explain how it works in the next section.
For those of you with a higher risk appetite, leverage allows you to trade more than you have in your brokerage account. On the one hand, this allows you to increase your profits if you feel confident in a particular trade. However, leverage is a very risky trading tool as you can increase your losses equally.
When you use leverage in your trades, you decide how much you want to use. This is expressed as a factor, such as 2:1, 5:1 or 20:1. You then need to multiply your “margin” by the factor to determine how much your trade is worth.
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Let’s say you’re interested in trading the FTSE 100, which represents the 100 largest companies listed on the London Stock Exchange (LSE). The FTSE 100 took a big hit after the Brexit referendum result was announced.
That said, you thought it was an overreaction by the markets and that the FTSE 100 would bounce back the next day. Therefore, you have decided to trade the FTSE as a CFD. However, you were very confident in the trade, so you decided to use leverage at 10:1.
As you can see from the above example, when leveraged CFD trading goes in your favor, your profits can increase by a short distance. However, regardless of your experience level, there is no negotiation
£500. This is of course provided no reasonable stop losses are set. Don’t worry, we’ll cover risk mitigation strategies in more detail below.
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As noted in the previous section, leveraged transactions are fraught with risk. This means you can lose a lot of money if your CFD trade goes against you. As such, you limit the amount of leverage you can apply to your CFD trades.
Not only are these limits set by the broker of choice, but the European Union has recently placed limits on the amount of leverage that retail traders can use.
Therefore, while the UK is a member of the European Union, you will need to comply with the leverage limits set by the European Securities and Markets Authority (ESMA), which we set out below.
However, the above restrictions apply only to those who are part of the retailer’s mandate. If you are a professional trader and can meet the broker’s due diligence requirements, the ESMA restrictions no longer apply. In some cases, this means you can trade with leverage of up to 500:1.
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As with other areas of the online investment scene, you should consider the risks involved in CFD trading. Basically, if the trade doesn’t go as planned, you lose money. That said, there are a number of tools you can use to reduce your overall exposure to CFD trading losses. There is a stop order ahead.
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