CFD means Contract for Difference, CFDs are a financial contract made between a buyer and seller to make good the profit or loss incurred between the CFD was purchased to when it was sold. CFDs are common in both Australia as well as the UK, they are mostly offered over indices, shares and currencies.
In the early days in the UK where CFDs began they were commonly called SWAP contracts. It wasn’t until approximately 2001 that CFDs grew to become popular with retail investors. It was CMC Markets and IG Markets, two large spread betting companies based in the UK that bought CFDs to the forefront in the retail trader’s arsenal. CFDs rapidly grew to be widespread in the United kingdom as they didn’t attract any stamp duty.
In 2002 both CMC Markets and IG Markets opened offices in Australia and started to actively market CFDs to Australian traders, the popularity of CFDs peaked in 2007. As a result of their popularity amongst Australian traders and investors many foreign CFD providers saw the potential in Australia and opened up offices. At present are over 13 CFD companies operating in Australia and an estimated 35,000 retail CFD traders.
In recent times CFDs have received a great deal of negative exposure as a result of traders incurring losses due to overexposing themselves to the market during volatility. This combined with the recent collapse of CFD provider Sonray Capital Markets has led to increased scrutiny by the Australian financial Services Regulator ASIC relating to how CFD providers deal with client money.
At present CFDs continue to be by far the most common financial product for retail traders in Australia, although unconfirmed it’s estimated that CFD volumes account for around 35% of ASX exchange turnover. As CFDs are an over-the-counter product it is hard to substantiate this number.
CFDs in Australia are mostly traded live on the internet through a variety of proprietary CFD trading platforms offered by the major providers. Many of these platforms were initially developed for forex CFD trading however due to the similarities between share CFDs and forex CFDs the platforms have be adapted to suit share CFD traders.
As Australia has the highest percentage of share ownership in the world on a per capita basis it isn’t surprising the majority of CFD traders have experience buying and selling equities online. The historical growth of the Australian share market has made share and CFD trading a prevalent pass-time for Australians.
Before you run out and join the 35,000 CFD traders in Australia you must make sure that you are fully conscious of the risks involved in CFD trading. Like all geared financial product CFDs offer sizeable rewards however these don’t come without risk. You must make certain that before you jump into CFD trading you read the Product Disclosure Statement (PDS) available from your CFD provider that outlines the risks and benefits of trading CFDs.