Contracts for difference
Investing or betting?
Contracts for difference (CFDs) are a way of betting on the
change in value of a share, foreign exchange rate or a market
index. CFDs often use borrowed money, which can magnify gains or
For every person who wins, there is a person on the other side
of the contract that loses the same amount. You will also have
to pay expenses.
How contracts for difference
Under a CFD, you are borrowing money to bet on the short-term
movement of share prices. If you're right, you make money. If
you're wrong, you lose.
Imagine that there is a buyer and a seller of a CFD. If the
share price increases, the buyer wins. If the share price
decreases, the seller wins.
You are not buying the underlying asset, just betting on the
Video: Understanding CFDs
In this video ASIC's Andrew Templer explains the concepts of
'long' and 'short' CFDs, leverage, initial margin and margin calls.
Because of the leverage in CFDs, gains and losses are magnified and
the risks are much greater. You can end up losing much more than
you put in.
CFDs are generally highly geared products. This means the money
you invest will generally only be a fraction of the market value of
the shares (or other market asset) you're 'contracting' for.
For example, you may only have to put up $5,000 for
a $100,000 contract. You are effectively borrowing the other
95%. In that case, a 1% change in the share price can turn
into a $1,000 loss (which is 20% of your investment).
The contract is a legally binding agreement, no matter what the
market value of the asset is. If the market turns against you, the
issuer of the contract:
- Will require you to pay extra money
- May close out your contract, for whatever it's worth at the
time, to recover some money. If there's not enough money, you will
still be legally obliged to make up the difference
You're effectively gambling a much larger amount of money than
if you went to the casino or racetrack. You face potentially
unlimited losses so think carefully before investing in CFDs. The
Australian Securities Exchange (ASX) also has information on CFDs.
CFDs are complex products. Even experienced investors will
struggle to understand the risks involved in trading them. You can
lose more than your initial investment.
ASIC has improved the information about CFD
products that must be disclosed to investors. This
information will help you understand the risks of CFDs so you
can decide if they're right for you. The new information will
appear in product disclosure statements
(PDSs). Our investor guide explains the details:
trading contracts for difference (CFDs)?
Contracts for difference are a way of betting on
the short-term movements of markets, usually with borrowed money.
Gains as well as losses can be magnified. You could be left in a
much worse position than when you started.
Last updated: 08 Oct 2015