An Introduction to CFD Trading in Australia

A contract for difference (CFD) is a popular form of derivative trading. CFD trading enables you to speculate on the rising or falling prices of fast-moving global financial markets, such as forex, indices, commodities, shares and treasuries.

If you’re new to the world of CFDs, it’s important to understand how they differ from other types of investable assets. In this guide, we’ll explain what CFD trading is and how it works in Australia. We’ll also compare the best brokers you can use to trade CFDs in Australia.

How to Trade CFDs in Australia in 3 Steps

Can’t wait to get started trading CFDs? You can place your first order in just three simple steps:

Step 1: What is the Best CFD Trading Account in Australia?

In order to trade CFDs in Australia, you’ll need a broker that offers these contracts. Getting the right broker is essential since your broker controls everything from how much CFD trading costs to what types of assets you’ll be able to trade with CFDs.

To help you get started, let’s take a closer look at six of our favorite CFD brokers in Australia:

Step 2: Learn How CFD Trading Works in Australia

While getting the right CFD broker is an important first step, you also need to understand how CFD trading functions before you can dive in.

What is CFD Trading in Australia?

CFDs are a type of derivative that enables you to speculate on the price of an underlying asset without actually owning it.

CFDs can be particularly advantageous for trading commodities and forex. When you buy CFDs for crude oil, for example, you don’t need to worry about the logistics of shipping and receiving the oil itself. But, you still profit when the price of oil goes up.

Another benefit to trading CFDs is that you can bet against assets. If you think the price of oil will go down, you can sell CFDs for crude. This gives you much more flexibility to trade when the market is falling as well as when it is rising.

How do CFD Trading and Shares Trading Differ?

There are several important differences between CFD trading and share trading.

First, as we noted, you can bet against a company when trading CFDs. While you can short shares to achieve the same purpose, selling CFDs doesn’t require a special brokerage account.

In addition, when you trade CFDs, you get access to leverage. That means that you can establish a much larger position than you have cash available for in your account. For example, if you trade at 10:1 leverage, you can buy $10,000 worth of CFDs with just $1,000 in your trading account.

Keep in mind that since you don’t own shares when you trade CFDs, you’re not eligible to collect dividends. But, this typically only matters if you’re investing in a dividend-paying company for months or years at a time. Most active traders aren’t worried about collecting dividends.

What Assets are Available through CFD Trading?

The types of assets you can trade CFDs for will depend on your broker. Most Australian CFD brokers offer CFDs for shares, although the diversity of companies available can range from a few dozen to more than 1,000.

Many brokers also offer CFD trading for forex, commodities, and cryptocurrencies. You’ll also see CFDs for bonds, stock indices, and even stock options and forex options. Note that the amount of leverage you can trade with and the amount of cash required as margin varies by asset type.

Is CFD Trading Legal in Australia?

CFD trading in Australia is completely legal. Brokers that offer CFD trading are regulated by the Australian Securities Investment Commission.

Is CFD Trading Taxable in Australia?

CFD trading is taxable in Australia, but your tax liability depends on whether you turned a profit or a loss for the year. If you made a profit, you need to report your earnings from CFD trading to the government. Your broker should issue an annual statement to help with this process.

If you lost money while CFD trading, you can offset that loss against your other income. While losing money from CFD trading isn’t a good way to save money, you will end up paying less in taxes.

What Regulations are in Place for Buying CFDs in Australia?

CFD trading in Australia is regulated by the Australian Securities Investment Commission. This agency puts limits on how much leverage retail traders can access for different types of CFDs. It also controls how much cash Australian CFD traders must have in their accounts as margin for leveraged positions. In general, these regulations help protect traders from creating positions that are large enough to be dangerous if a trade turns bad.

What Risks are Involved with Buying CFDs in Australia?

The main risk when trading CFDs is that you can lose more money than you invested. If the price of the underlying asset drops precipitously, you can actually end up with a negative account balance. This is especially possible if you trade CFDs with a lot of leverage. In that case, you’ll end up owing your broker more money than you originally had in your trading account.

Another risk when trading CFDs is that you only own the contract, not the underlying asset. So, you can’t benefit from a long-term rise in the price of an asset in the same way that you would if you owned it outright. This makes CFDs more suitable for short-term trading.

It’s important to realize that CFDs are complex derivatives. Pricing can be opaque and confusing, which makes it more difficult to understand your profit or loss potential. Make sure you fully understand how CFD trading in Australia works before you start buying contracts.

Step 3: Learn CFD Trading Strategies in Australia

The best way to profit from CFD trading is to approach the market with a concrete strategy. There are many different routes you can go, but we’ll highlight a few of the most common strategies for CFD trading.

Swing Trading Strategy

Swing trading involves looking for changes in an asset’s price momentum. If a share, say, had been steadily rising in value, swing traders might see an opportunity to sell CFDs for that share just as it reverses and starts to trend downward.

The key to swing trading is recognizing when an asset’s momentum changes. To do that, you’ll need to rely on technical charts and indicators. Most swing traders hold positions for a few days at a time.

Hedging

Hedging involves establishing multiple positions that anticipate the market moving in different directions. For example, you can buy CFDs for Apple while selling CFDs for Microsoft. Regardless of whether the tech sector rises or falls, one CFD position will gain in value while the other will lose value.

Hedging is a good strategy for managing the risk that comes with CFD trading. But, in order to profit, it’s important that your positions are carefully correlated with one another.

Short Term vs Long Term

You can also hedge your CFD positions over time rather than across assets. For example, if you think an asset will rise in the long term but is oversold in the short term, you can create two positions around that asset.

This type of time-based strategy is particularly useful if you’re trading options CFDs, since the value of the underlying options is already dependent on the time remaining to expiration.

Breakout Strategy

A breakout strategy involves looking for assets that are about to break above a key resistance level. The idea is that once the resistance level is breached, the price of the asset will rise significantly on strong momentum.

This strategy bears some resemblance to swing trading in that you’ll need to use technical charts to evaluate when an asset is about to breakout. When trading CFDs with a breakout strategy, you should always set a price target for your trade to lock in your profits.

Step 4: Open a CFD Trade

Now that you understand the process a little better, you can open a crypto trade at a broker of your choosing.

The account registration and execution process should be straightforward.

Pros and Cons of CFD Trading

Conclusion

Trading CFDs is one of the best ways for Australian traders to access the market. With CFDs, you can trade anything from shares to forex to commodities. Better yet, you can leverage your positions so that you can make significant profits even with a small initial investment.

Ready to trade CFDs in Australia? Open an account with one of our recommended CFD brokers and get started today.

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