CFD trading in Australia has become a popular way to invest. They provide the opportunity to profit from both up-side and downside movement of an underlying stock, index or futures contract. Using CFD allows traders to use more significant margins when buying assets than using regular margin loan accounts that brokers typically offer.
Like any other investment, some risks are involved when you decide to trade in CFDs. The fact is that for you to be able to utilise the leverage feature of these contracts, you may need to deposit more money than if you were going long on ordinary shares or securities. This means that if the market does move against your position, you may be required to deposit more funds to maintain your margin level or risk being closed out of your position.
One crucial factor you should always consider before using CFDs is how comfortable you are with taking on risks. Remember that while you can make good profits if the market moves in your favour, losses can also be magnified if the trade goes against you. Australian brokers offer a wide range of CFDs across many different asset classes, and you must choose one that offers the products which align with your investment goals and risk appetite.
Why Should You Use CFDs?
Leverage
Leverage is the ability to control a more significant number of shares with just a small percentage as margin. Typically, less than 10% of your investment capital will be required because you only have to put down an initial margin deposit which can even be lower than the total value of your trade. This means that you can benefit from more prominent market movements without paying for the whole cost upfront.
Interest Payments
When you use CFDs, all interest payments on the cash collateral are returned to your account at no extra cost to you. If you were using standard margin loan accounts, they would not pay any interest on these funds, and the broker would still lend out this money, but now it would belong to them.
Higher Leverage Ratios
You can also get leverage ratios up to 500% on some indices with CFDs. This means that if the index moves 1%, you will gain a profit of 0.5%. When trading stocks, your leverage ratio may be limited to 200%. Still, with other assets such as Forex and Cryptocurrencies, it is possible to have much higher borrowing levels, leading to more significant returns on investment.
Short Selling
CFD’s allow short selling, where traders sell an asset without actually owning it to profit from a price drop. This will enable traders to enter into more risky trades because they can place bets against company dividends or even share prices.
Hedging and Speculation
Hedging is a way to protect an existing position in the market by taking on an opposite position in the same or related security. For example, if you are long on ABC company shares, you can hedge that trade by shorting ABC company’s competitor XYZ. This will help to limit your losses if the share price falls.
Speculation is when you take a position in the market intending to make a profit from price fluctuations. You can do this by trading CFDs on any asset class.
Diversification
Diversification is the process of investing in different assets to reduce your overall risk. By using CFDs, you can trade in different geographical regions and across many different asset types, which will help to ensure your portfolio is more diverse.
24/7 Trading
CFDs are traded on global exchanges, which means they are available for trading 24 hours a day, five days a week. This allows you to trade when it suits you and will enable you to take advantage of price movements that may not be available during standard market hours.
No Fees or Commissions
No commissions or fees are charged on your trades when you trade CFDs. No fees or commissions allow you to save a lot of money over time and make CFD trading more cost-effective than other investment forms.
