A Contract For Difference (CFD) is a derivative trading instrument that allows you to trade the price movements (when you enter and exit a trade), without owning the underlying instrument, in most cases shares or equities but also indices and forex.
CFD trading is almost the same as to full price share trading except that when you trade a CFD you don’t own the actual share. If you trade a CFD on the Commonwealth Bank or BHP Billiton, you are trading the price difference between your entry point and your exit point. You don’t own the Commonwealth Ban or BHP Billiton shares, you are only counting on their price moving up or down.
Share CFDs are the most common type of CFDs is however there are also other CFDs for Sectors, Indices and other financial instruments such as commodities and treasuries. A full list of tradeable CFDs will be found in on your provider’s website.
Since CFDs were introduced in Australia in late 2001 the number of CFD traders has increased daily. The value and volume of trades backed by CFDs have also increased dramatically. There are estimates that about 10-15% of the total transactions in the Australian Stock Exchange are now backed by CFD trades. In the UK, where CFDs originated, it is estimated that CFD-backed trades account for about 25-30% of equity trades in the London Stock Exchange.
The growth and popularity of CFDs has been tremendous over the past few years and now there are more countries accommodating these financial instruments to be made available and tradeable in their jurisdictions.
Share CFDs are the most common type of CFDs. However, there are many other types of CFDs that can be traded and the list is still growing.
In Australia, most of the CFD providers offer CFDs on the top 500 listed shares. The list is continuously expanding due to demand for other share CFDs and the entry of new providers who may offer specific groups of CFDs not offered by existing providers. You should consult your CFD provider for a complete list of tradeable CFDs they offer.
The Australian stock market consists of 12 industry groups called sectors. This grouping is based on an international standard to make it easier to classify companies into their respective industries.
International shares and indices
Aside from Australian shares, many CFD providers also offer CFDs on international shares including US, European, UK and Asian shares. This means you can trade share CFDs on Google, Amazon, Wal-Mart, Honda, Toyota, Vodafone, BMW, Porsche and other big brands that are not available in the Australian market.
An index is a collection of stocks and the corresponding composite value of its components. In Australia, the All Ordinaries (All Ords) is the index which consists of all the publicly listed companies in the Australian Stock Exchange. The closing value of the All Ords changes everyday depending on the price movements of all the shares. Other major indices in the international financial markets include the Dow Jones Industrial Average (USA), Nasdaq (USA), FTSE 100 (UK) CAC 40 (France), DAX (Germany), Nikkei 225 (Japan), Hang Seng (Hong Kong).
Check with your CFD provider if they offer CFDs on international indices because there are some good trading opportunities within these indices particularly in times of big uptrends or downtrends.
Trading share CFDs on international shares, sectors and indices offers many advantages including:
-Access to bigger and more liquid markets that offer more trading opportunities than what is available locally
-Low brokerage fee because you don’t have to pay the extra administrative charges that you pay to trade physical shares in overseas companies
-Australia’s time zone makes it user friendly if you want to capture some trading action in the UK, US or Asian markets.