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 six of 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: Open a Trading Account
Choose one of our recommended online brokers that offer CFD trading.
Step 2: Deposit Funds
Fund your CFD trading account by credit or debit card, bank transfer, or e-wallet.
Step 3: Demo and Live Trading
Search for a company, choose how many CFDs you want, and click ‘Trade’.
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:
1. eToro - Social CFD Trading
eToro offers CFDs for a huge variety of assets. This broker’s contracts cover more than 800 global shares, dozens of forex pairs and commodities, and even cryptocurrency trading.
What we especially like about eToro is that it makes CFD trading more fun. The online broker serves as a social network, enabling you to connect with other traders and see what contracts they’re holding. You can start conversations or copy a successful trader’s portfolio in just a few clicks.
On the whole, there’s not much to dislike about eToro. The platform keeps CFD spreads low and offers moderate leverage for most assets.
- Asset Variety: More than 800 global shares
- Social Trading: Start discussions with other traders
- Low Spreads: Don’t overpay for CFD trading
- Limited Charting: Built-in charts are more suitable for beginners
2. Plus500 - User-friendly CFD Trading
Plus500 is a great choice for traders just getting started with CFD trading in Australia. The platform offers easy to use charting tools and doesn’t overcomplicate trading with tons of rules and fees. Just keep in mind that Plus500 isn’t a social brokerage platform like eToro.
On top of that, Plus500 has relatively low margin requirements when CFD trading, meaning you can easily establish large positions with just a small amount of cash in your trading account. Plus500 offers CFD trading for shares, ETFs, forex, cryptocurrencies, commodities, and even stock options.
- Simple Analysis: Easy technical charts and price alerts
- Low Margin: Set up leveraged trades with little cash
- No Social Trading: Cannot interact with other traders
4. AvaTrade - Advanced Charting Tools
AvaTrade is built for advanced traders who want access to advanced technical analysis tools. The platform has its own impressive charting software, which includes more than 80 built-in technical studies and comes with a mobile app for trading on the go.
In addition, every AvaTrade account comes with access to MetaTrader 5. You can use this popular trading software to build custom indicators, backtest strategies, and automate your CFD trades.
The selection of assets for CFD trading is somewhat limited on AvaTrade, especially if you want to trade share or commodity CFDs. However, the platform does offer CFDs for forex options, which you won’t find at many competitors.
- Comprehensive Charting: Built-in platform includes 80+ indicators
- MetaTrader 5: Develop and test custom strategies
- Forex Options: Hedge forex positions with CFDs
- Limited Assets: Mostly US shares and limited commodity CFDs
6. IG - Wide Asset Variety
IG is a renowned broker with a nearly 50-year history. This broker has established a foothold in more than 17,000 trading markets around the world, enabling it to offer by far the widest range of any online CFD broker we’ve seen. In addition to trading CFDs for thousands of stocks and every major and minor forex pair, you can trade CFDs around market volatility, stock indices, and interest rates.
On top of that, IG offers an extremely robust trading platform. You can create your own custom indicators, build charts on your smartphone, or set up trading signals and alerts. IG also offers access to MetaTrader 4 for trading forex CFDs.
As you might expect from such an established broker, IG’s spreads are slightly higher than what competitors charge. Still, they’re well within the median range for common assets, so this isn’t a major concern for most traders.
- Huge Asset Variety: Thousands of shares and most forex pairs
- Powerful Platform: Set up trading signals and alerts
- MetaTrader 4: Backtest strategies for forex CFD trading
- High Spreads: Slightly more expensive than other CFD brokers
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 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.
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
Ready to place your first CFD trade? We’ll show you how using eToro. If you chose another CFD broker, don’t worry, the process is very similar at all the online brokers we recommended.
Create an Account and Verify your Identity
The first thing you need to do is to create your trading account. At eToro, click on the ‘Join Now’ button on any page and enter your account information.
You’re required to verify your identity during this process as well. Upload a copy of your driver’s license or your passport along with a credit card statement, bank statement, or tax document to verify your address. The system will automatically process your documents and verify your account instantly.
The next step is to add funds to your new account. Navigate to your account page, then click ‘Fund Your Account’. You can pay by debit or credit card, PayPal, bank transfer, or an e-wallet like Skrill or Neteller.
Buy CFDs and Trade
Now you’re ready to trade. Search for the underlying asset you want to trade in the search box at the top of the page, then click on it when it appears in the drop-down menu. From the asset page, click ‘Trade’ to be taken to the order form.
Here, you’ll enter how many CFD contracts you want to buy or sell and specify whether you want to leverage your position. You can also set up a stop loss or take-profit level if desired. When you’re ready, click ‘Trade’ to open your CFD trade.
Pros and Cons of CFD Trading
eToro - Social Trading Platform with 0% commission
- 0% Commission on trading fees
- Trade Stocks, Forex, Crypto and more
- Copy Trades of Professional Investors
- Only $50 Minimum Deposit
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.
What is the minimum I can invest when trading CFDs?
The only minimum you need to worry about when trading CFDs is your broker’s minimum account deposit. This varies between brokers, but is typically 50 to 200 AUD. When trading CFDs, there is effectively no minimum investable amount.
What is the spread in CFD trading?
The spread is the difference between the bid and ask price of a CFD. Your broker pockets this difference as commission for the trade. The spread varies by asset, but is typically less than 0.25% for most CFD trades.
What happens when a CFD contract expires?
CFD contracts typically have an expiration date at the end of the current month. But, your broker will automatically roll your contract over into one for the next month. That means that you don’t need to worry about CFDs expiring like you do for many other types of derivatives.