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What to know before purchasing a CFD in Australia

  • August 26, 2022

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As Australia's financial markets continue to grow in popularity, more and more international investors are looking to trade CFDs (Contracts for Difference) to take advantage of the potential profits. However, before jumping into the world of CFD trading, there are a few things that every investor should know to maximize their chances of success.

Saxo can help you with more information on CFDs.

What is a CFD?

A CFD is a derivative instrument that allows traders to speculate on the price of an underlying asset's movement without actually owning that asset.

How do CFDs work?

When you trade a CFD, you are essentially speculating that the underlying asset's price will either rise or fall. If you trust the price will increase, you will enter a long position; if you think the price will fall, you will enter a short position.

What assets can be traded as CFDs?

You can use CFDs to trade various underlying assets, including shares, indices, commodities, currencies, and even cryptocurrencies.

What are the benefits of trading CFDs?

CFD trading offers several advantages over other investment vehicles, such as shares and managed funds. These include leverage, which allows you to control a more significant position with a smaller amount of capital, and short selling, which allows you to profit from falling prices.

What are the risks of trading CFDs?

While CFD trading can offer substantial rewards, it also carries a high risk. It is due to leverage, which amplifies both profits and losses. Therefore, it is imperative to only trade with capital you can afford to lose. Another risk is counterparty risk, which is the potential for the other party in the contract to default on their obligations. This risk is usually mitigated by choosing a reputable broker.

How do I choose a CFD broker?

When choosing a CFD broker, there are a few things you should look for, including:

  • A broker regulated by the Australian Securities and Investments Commission (ASIC)
  • A broker that offers a wide range of markets and asset classes
  • A broker that provides competitive pricing and trading conditions
  • A broker that offers a user-friendly trading platform

How do I open a CFD account?

Opening a CFD account is relatively straightforward. Most brokers will require you to complete an online application form and provide some documents, such as proof of ID and residency. Once the brokerage has approved your account, you can deposit funds and start trading.

What are the costs of trading CFDs?

CFD trading involves two types of costs: the spread and commissions. The spread is the difference between an asset's buy and sell prices, while commissions are charged on each trade. Most brokers will also charge overnight funding fees for positions open after hours.

What taxes do I pay on CFDs?

When you trade CFDs, you are subject to capital gains tax (CGT), meaning any profits you make from trading CFDs will be subject to CGT, less any losses you have incurred.

What other costs are there?

In addition to the abovementioned costs, there are other costs to consider when trading CFDs. These include slippage, the difference between the price you expect to pay for an asset and the actual price you pay, and funding rates, which are charged on leveraged positions held overnight.

How to trade CFDs

Deposit funds into your account

After opening an account, you need to fund it. Most brokers offer a variety of funding methods, such as bank transfers, credit/debit cards and PayPal.

Select the asset you want to trade

You can trade CFDs on various underlying assets, including shares, indices, commodities, currencies and even cryptocurrencies.

Choose your position

When trading CFDs, you can take a long or short position. If you think the asset price will rise, you will take a long position; if you think it will fall, you will take a short position.

Enter your order

Once you have chosen your position, you need to enter your order. It will specify the size of your trade and the price at which you want to enter the market.

Monitor your trade

You will need to monitor your trade and ensure it is moving in the desired direction. If it is not, you may need to adjust your order or close your position.