Contracts for Difference (CFDs) are a derivative contract between two parties to exchange the difference between the purchase price and the sale price of an underlying security, e.g. ASX-listed shares. A CFD offers you all the benefits of trading shares without having to physically own them.

Remember that CFDs are geared and can results in losses that exceed your initial deposit. They may not be suitable for everyone, so please make sure that you fully understand the risks involved.

Margin and Leverage

CFDs are traded on margin where to open a trade only a percentage amount of the actual trade value is required to be put up or deposited as margin equity or collateral. A broker will require the margin equity of a trade to be available in your account before permitting you to open a CFD position (long or short). The broker will then effectively lock-up the margin equity in your account as surety against an unanticipated trading loss.

For example, if you are required to deposit a margin of 10%, this allows you to leverage or gear your investment 10 times. Therefore, you need to place just $10,000 by way of collateral to trade $100,000 of face value of the security. With a gearing ratio of 10 times, a change of 2% in the underlying value of your trade will result in a 20% profit or loss (or $2,000) on your collateral deposit of $10,000.

With leverage you are able to magnify the returns and risks on your investment. This is a more efficient use of your capital because you only have to allocate a small proportion of the value of your position to secure a trade.

Take a look at some of our HomeTrader clients who have achieved over 200%^ return and read about some of their real CFD trading experiences.

Click here to access further information on CFDs or register for HomeTrader’s FREE Intro Seminar.

Other Advantages

Besides offering the ability to trade using margin CFDs offer many other advantages over trading physical shares including:

• Trade both rising and falling prices - as you are trading the price movement of a share without physically owning it, it is just as easy to sell a CFD over a share, as it is to buy it. Therefore, a CFD trader has the opportunity to go both long and short as well as take advantage of short-term and intra-day price movements.
• Use unrealised profits - the CFD position is re-valued in real time where open positions will be valued at the current trading price of the underlying share. This is referred to as “marked-to-market” and any unrealised profits/losses on open positions contribute to the equity balance of your account. Therefore, any unrealised profits can be used as equity to open new positions.
• Lower commission costs - CFDs are a more cost efficient way for speculators to trade shorter term strategies with the aim of profiting from fluctuations in the physical market as the commission costs associated with trading CFDs are often less than the equivalent costs of trading shares through an internet share broker.
• Automated entry and exits - Conditional orders can be used to automatically enter or exit a CFD position if the price of the underlying share trades at a specified level which is extremely useful facility if you are unable to access the market during trading hours. Conditional orders are also an important tool in implementing risk management strategies and taking a disciplined approach to your trading. They help mitigate any emotion which may interfere with you closing out a position at pre-determined targets in order to take a profit or limit a loss.
• Participate in corporate actions - CFDs mirror any corporate actions that take place in the underlying share where a cash, price or quantity adjustment is passed through into the CFD position accordingly. Corporate actions include dividends, share splits or consolidations, and share issues (bonus, rights, entitlement etc).
• Trade a variety of markets and products - In addition to shares, CFDs may be offered over a variety of instruments including: share indices, share sectors, commodities, foreign exchange, futures and option contracts. CFDs may also be offered over an instruments denominated in a foreign currency, e.g. overseas shares.

For more information on how to profit from CFD trading attend HomeTrader’s FREE Intro Seminar.