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 losses.

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 work

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 price movement.

Video: Understanding CFDs

CFDs video

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.

Transcript: Understanding CFDs

The risks

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:
Thinking of 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.

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Last updated: 08 Oct 2015