Thinking of trading contracts

for difference (CFDs)?

This guide from the Australian Securities and Investments Commission
(ASIC) can help you assess the risks of CFDs.
How this booklet can help you Contents

•  his booklet has information about the operation and risks of

T Your questions answered Page 5
trading contracts for difference (CFDs). In producing this booklet, If you have a specific question about CFDs,
ASIC does not endorse or promote this product or consider that use this table to find the answer in this booklet.
it is suitable for many investors.
Know what the product is Page 6
•  he complex structure of CFDs and the risks associated with
T
Find out about CFDs and how they work. Learn about
them mean that they are unlikely to meet the investment needs
leverage and the differences between CFDs and other
and objectives of most retail investors.
financial products.
•  ead this booklet, especially the section ‘Are CFDs right for
R
you?’ together with the Product Disclosure Statement (PDS) Consider the risks Page 12
before deciding whether or not to trade CFDs. There are significant risks involved in trading CFDs,
including counterparty, investment and liquidity risks.
•  FDs are a complex and risky product. Make sure you understand
C
Find out what these risks are and where to get more
the risks before making a decision about trading CFDs.
information.
•  he information in this booklet is general in nature. For a
T
detailed strategy that takes into account your individual needs Are CFDs right for you? Page 20
and circumstances, consider seeking professional advice from a Decide if trading CFDs is likely to meet your
licensed financial adviser. investment needs and objectives.

Not all CFDs are the same Page 22

Learn about different types of CFDs and their
features and risks.

Trading essentials Page 28

Understand the nuts and bolts of trading CFDs,
Remember including fees and other charges, margin calls and
how trading platforms work.
Anything you put your money into should meet
your investment goals and suit your circumstances. Do your own research Page 34
No one can guarantee the performance of any financial product. Always read the PDS and other disclosure
documents before making an investment decision.
You can lose all of or more than the money you put in if
something goes wrong. Tips and traps Page 42
You are taking a big risk if you put all your money into one Watch out for pressure-selling tactics and
type of investment (for example, trading CFDs). Spreading your promotional gimmicks.
money between different types of investments (‘diversification’)
reduces the risk of losing everything. How to complain Page 45

3
 Your questions answered

CFDs are a high-risk financial product. It is important that you

understand the key features of CFDs before you decide whether or
not to risk your money.
All the information in this booklet is important if you are
considering this product. However, if you have a specific question,
the following table may help you find the relevant information.

What is a CFD? See page 6

Is trading CFDs the same as investing in shares? See page 7

What are the main risks of trading CFDs? See page 12

What is ‘counterparty risk’? See page 14

How can I decide if trading CFDs is suitable See page 20

for me?

Do all CFD providers operate in the same way? See page 22

What are the differences between over-the-counter

(OTC) CFDs and ASX exchange-traded CFDs? See page 22

What fees and charges (including interest)

will I pay for trading CFDs? See page 29

How do ‘margin calls’ work? See page 31

How do ‘stop losses’ work? See page 32

What other information is available on CFDs? See page 34

What are the common traps to watch out for? See page 42

4 5
 Know what the product is

What is a CFD? What is ‘leverage’?

A CFD is a leveraged ‘derivative’ financial product. CFDs are CFDs allow you to bet on rises and falls in shares, currency and
derivatives because their value is derived from the value of another other assets while only putting up a small amount of your own
asset (for example, a share, commodity or market index). money. You are leveraging off the money you do have, in the hope
of making more.
When you trade CFDs, you take a position on the change in value
of the underlying asset over time. You are essentially betting on With CFDs, you only have to put in a fraction of the market value of
whether the value of an underlying asset is going to rise or fall in the underlying asset when making a trade, sometimes as little as
the future compared to what it was when the contract was taken 1%. The remaining 99% of the value of the asset is covered by the
out (or executed). CFD provider. Even though you only put up 1% of the value, you
are entitled to the same gains or losses as if you had paid 100%.
All CFD providers let you trade both ‘long’ and ‘short’. ‘Going long’
The actual percentage of the market value that you will be asked
means buying a CFD in the expectation that the underlying asset
to put in will vary for different CFD providers, and for different
will increase in value. ‘Going short’ means selling a CFD with the
expectation that the underlying asset will decrease in value. In both underlying assets.
cases, when you close the contract, you hope to gain the difference This can make CFDs seem very attractive. Even if you don’t have
between the closing value and the opening value. the money to buy the underlying asset itself, you can share in
For example, you might buy a CFD (‘go long’) over Company X’s potential gains and losses on the value of that asset.
shares. If the price of Company X’s shares rises and you close out But because you are trading with leverage, the gains and losses are
your CFD, the seller of the CFD (the counterparty) will pay you the magnified—and the risks are much greater. You can end up losing
difference between the current price of the shares and the price much more than you put in.
when you took out the contract.
However, if the price of Company X’s shares falls, then you would How is trading CFDs different to investing in shares?
have to pay the difference in price to the seller of the contract. This Unlike investing in shares, when you trade CFDs, you are not
could be many times the amount of money you originally put in, buying or trading the underlying asset. What you are buying is a
because of leveraging. contract between yourself and the CFD provider.
CFDs do not have an expiry date like options or futures contracts. Because all you own is a contract with the CFD provider, you are
A CFD can only be closed by making a second, ‘reverse’ trade. also taking a bet that the CFD provider is in a sound financial
position and will be able to meet their obligations to you. For more
on this risk, known as ‘counterparty risk’, see page 14.
Also, while the value of the CFD is derived from the value of the
underlying asset, it may not track it exactly. These small differences
can significantly affect any gains or losses you make.

6 7
 What is the ‘underlying asset’?
When you buy or sell a CFD, you are making an agreement to What’s at stake for you?
trade the difference in the value of an underlying asset (sometimes CFDs are not a simple product. Trading CFDs is
called the ‘underlying security’ or the ‘reference asset’) between complex for several reasons:
now and a future date. But you are not actually trading the
underlying asset itself. •  FDs might seem similar to mainstream
C
investments such as shares, but they are very different.
CFD providers allow you to buy or sell CFDs on a range of
underlying assets. Shares are the most common underlying asset. •  FDs are not standardised and every CFD provider has their
C
But most CFD providers also allow you to trade CFDs on other own terms and conditions.
underlying assets, such as commodities and foreign exchange (FX). • It is very hard to assess the counterparty risks involved in
They may also allow you to trade certain market indices, such as trading with any CFD provider (see page 14).
the ASX 100, which aggregates the price movements of all the top •  everage means small market movements can have a big
L
100 stocks listed on the Australian Securities Exchange (ASX). impact on the success of your trades.
If you are thinking of trading CFDs, you need to know and •  FDs are dependent on conditions in the market for the
C
understand both how CFDs work and also about the underlying underlying asset, even though you are not actually trading the
assets on which the CFDs are traded. For example, if you want to underlying asset.
trade CFDs where the underlying asset is FX, then you must have
knowledge and experience of the FX market and the conditions that As well as understanding how CFDs work, you also need a good
affect that market. understanding of the risks of trading CFDs. For more about these
risks, see page 12.
All CFD providers are legally obliged to give you a disclosure
document called a Product Disclosure Statement (PDS) before you
open an account. This document should clearly set out what the
underlying assets of any CFDs are. Read this information carefully.
If you don’t understand how CFDs work and how the underlying
asset, such as FX, works, then you are unlikely to be able to trade
CFDs on that asset successfully.
For more about PDSs and information given by CFD providers, see
‘Do your own research’ on page 34.

8 9
 Example of a CFD trade How the price of Beta shares affects Peter’s return*
Peter has been trading shares and derivative investments such
as options for 10 years and has recently started to trade CFDs. If the price of Peter would Resulting in a return
He shopped around and looked at several CFD providers before Beta shares to gain/lose on his initial margin of
opening an account. Rises by 20% $6.00 $3,934.00 393%
Peter has been doing some research on Beta Pty Ltd (Beta) and Rises by 10% $5.50 $1,937.00 194%
thinks that its share price is undervalued. He decides to take a Rises by 5% $5.25 $938.50 94%
long position on CFDs over Beta shares.
Rises by 2% $5.10 $339.40 34%
The current price of a CFD over Beta shares offered by the
CFD provider is $5. Peter logs into his CFD trading account Stays the same $5.00 -$60.00 -6%
and places an order to buy 4,000 Beta CFDs. His order is Falls by 2% $4.90 -$459.40 -46%
accepted by the CFD provider at $5 per CFD. The total contract
Falls by 5% $4.75 -$1058.50 -106%
value is $5 x 4,000 = $20,000.
Falls by 10% $4.50 -$2,057.00 -206%
The CFD provider requires a 5% margin to open a trade, which
is deducted from Peter’s CFD trading account. The margin is Falls by 20% $4.00 -$4,054.00 -405%
equal to $20,000 x 5% = $1,000. The provider also charges Peter
a commission of $30 on this trade. *This example assumes that Peter closes his trade at the indicated price.
Gains/losses and rate of return take into account commission charged at 0.15%
What happens next depends on what happens to the price of on the face value of the opening and closing trades, but do not take into account
Beta shares (see table opposite). any other fees, charges or interest. In practice, these other factors will affect your
returns from trading CFDs.
Any gains Peter makes on this trade are also dependent on the
CFD provider being willing to accept his trades and meeting
all their obligations to him. This includes crediting any gains
to his CFD trading account after the closing of a position and Return on Peter’s CFD trade
transferring them to his bank account on request. 400%
$6.00

300% Return on Peter’s CFD trade

$5.50
200%

100% $5.25

Peter’s return
$5.10
0%
$5.00
$4.90
-100%
$4.75
-200% Price of Beta shares
$4.50
-300%

-400% Change in price of Beta shares Return on money Peter invested

$4.00

10 11
 Consider the risks

How much can you afford to lose? Investment risk

The risks and complexity of CFDs mean that they are unlikely to When you buy a CFD over a share, index or commodity (known as
meet the investment needs and objectives of many retail investors. ‘going long’), you hope that the value of that underlying asset will
rise, so you can sell the CFD for a profit. If you a sell a CFD over a
If you trade CFDs, you are putting potentially very high amounts
share, index or commodity (known as ‘going short’), you hope that
of your own money at stake. Here are some of the risks in trading
the value will fall.
CFDs:
However, the reality of investment markets means that even the
• Investment risk: This is the risk that investment markets move
most educated predictions can prove wrong, especially in the short
against you.
term. Unexpected new information, changes in market conditions,
•  ounterparty risk: This is the risk that the CFD provider or
C changes in government policy and many other unpredictable
another counterparty to a trade fails to fulfil their obligations events can result in quick changes in market value.
to you. Trading CFDs exposes you not only to the risk of the Because CFDs are very highly leveraged, even a small change in
CFD provider failing to act as promised, but you could also lose the market can have a big impact on your trading returns.
money if other companies the provider deals with, or other
clients, fail to meet their obligations. If changes in market value have a negative effect on your trade,
the CFD provider may demand that you put more money in at
•  lient money risk: This is the risk of losing some or all of your
C short notice (called a ‘margin call’) to cover the adverse change
money held by the CFD provider. and keep your trade open. If you cannot meet this margin call,
•  iquidity, gapping and execution risks: Market conditions and
L you may have to sell at a loss, or the CFD provider may close
the mechanics of trading might mean you cannot make trades out your trades at a loss without consulting you. For more about
when you would like to, or that your trades are not filled at the margin calls, see page 31.
price you expect.
While you can take steps to reduce some of these risks, you cannot
protect yourself from all of them. If you are considering trading
CFDs, make sure you understand these risks. See also ‘Are CFDs
right for you?’ on page 20.

12 13
 Counterparty risk The CFD provider
A ‘counterparty’ is the person or company on the other side of a
financial transaction. When you buy or sell a CFD, the only asset  he success of CFD trading doesn’t just depend on picking the
T
you are trading is a contract issued by the CFD provider, so the right CFDs to trade. When you trade CFDs, you are relying on the
CFD provider becomes your counterparty. In addition to the CFD CFD provider to accept and process your trades, make payments
provider, trading CFDs also exposes you to the provider’s other owed to you while your trades are open (for example, notional
counterparties, including other clients and other companies the ‘dividend’ payments), credit any proceeds of profitable trades to
CFD provider deals with. you, and pay you money out of your CFD trading account when
you ask for it.
Counterparty risk (sometimes called ‘credit risk’) is the risk that a
counterparty fails to fulfil their obligations. If the CFD provider gets into financial difficulties, they may fail
to meet some or all of these obligations to you. This means that
ASX exchange-traded CFDs carry a much lower level of counterparty even if you have been trading profitably, you may never receive
risk compared to over-the-counter (OTC) CFDs. This is because the those profits.
exchange’s clearing house, ASX Clear (Futures) Pty Limited, acts
Check the financial statements of an OTC CFD provider, if they
as the counterparty to each trade, so both the buyer and the seller
are available, to get some idea of whether they have sufficient
contract with the clearing house and not directly with each other.
financial resources and cash available to run their business.
All ASX exchange-traded CFD trades are centrally cleared and
processed by ASX Clear (Futures) Pty Limited, which can also Other clients
draw on money in the Fidelity Fund. The Fidelity Fund is designed
to assist investors where an investor has given money or other If the CFD provider’s business is concentrated with a few clients
property to an ASX participant for a transaction and the participant and one or more of those clients suffer trading losses which the
has misappropriated or fraudulently misused the money or other client can’t cover, this may cause significant financial problems
property. for the CFD provider, which may then affect whether or not they
can meet their obligations to you.
For more about the differences between ASX exchange-traded
CFDs and other types of CFDs, see pages 22–25. Because most OTC CFD providers pool the money of different clients
together into one or more client accounts, your access to money
Following are some examples of the different counterparty risks held by the CFD provider could be affected if other clients fail to
that can be involved in trading OTC CFDs. pay the CFD provider the money they owe. For more information,
see ‘Client money risk’ on page 17.

14 15
 Other companies the CFD provider deals with Client money risk
The law sets down some requirements for how CFD providers deal
OTC CFD providers generally have arrangements with other with your money, including how they handle it and what they can
companies that can have a significant impact on you. If one or do with it. They must separate your money from their own money.
more of these companies gets into financial difficulty, this may They are not obliged, however, to separate your money from the
affect the ability of the CFD provider to meet their obligations money of other clients and most providers ‘pool’ all their clients’
to you. money into one or more pooled client accounts.
For example, the CFD provider may ‘hedge’ your trades with While the client money provisions in the law protect you from
one or more other companies. This means that if you place a some misuses of your money by the CFD provider, they don’t
CFD trade over a particular share, commodity or index, the CFD protect you in all circumstances.
provider may take out corresponding arrangements with another
company to get exposure to that share, commodity or index for When you place a CFD trade, the law permits the CFD provider to
internal risk management purposes. If the other company doesn’t withdraw an initial margin and any further margin required from
deliver what they promised under the hedging arrangement, the the pooled client account while the trade is open. Not all CFD
provider may close your trades without warning or be unable to providers do this. If the CFD provider does withdraw margins from
pay you any profits or other money. the client account, the money ceases to be ‘client money’ and is no
longer protected by the law.
Look for information in the CFD provider’s Product Disclosure
Statement (PDS) or ask them about their hedging arrangements. The customer agreements used by some OTC CFD providers allow
If they hedge with multiple companies of strong financial them to make withdrawals from client money for a wide range of
standing, this can reduce the risk of something going wrong. other purposes. You should check the details carefully as these
clauses mean that your money is much less protected. Read the
Some CFD providers ‘white label’ another company’s CFDs. This terms of the client agreement and PDS carefully to find out where
means the CFD provider relies very heavily on the other company you stand (see page 34).
to be able to offer CFDs, process trades and administer client CFD
trading accounts. The CFD provider is also totally reliant on this The actions of other clients can also affect the protection of your
company for hedging. In this situation, the CFD provider may money. Because most CFD providers pool all their clients’ money
have only very little capital or resources themselves. This exposes together in one or more accounts, if one client fails to pay money
you to the double risk of either the CFD provider or the company they owe (for example, on a losing trade), the pooled client account
they rely on getting into financial difficulties. which is holding your money could be in deficit. If the CFD provider
does not cover this deficit, there may not be enough money in the
account to pay you what you are owed. If the CFD provider goes
out of business while the pooled client account is in deficit, there is
no guarantee that you will recover all or any of your money that is
in the account.

16 17
 Liquidity risk, gapping and other trading risks
Liquidity risk is a reality of trading on any market. What’s at stake for you?
If there aren’t enough trades being made in the market for an The risks of trading CFDs are significant, and some
underlying asset (called a lack of ‘liquidity’), you may be unable to of them can be very difficult to assess. Even if you
trade CFDs over that asset. The CFD provider may either decline manage investment risk and the risks associated
to fill your trades, or only agree to process the trade at an inferior with leverage, it is very difficult to manage the other
price, even if you already have an open CFD position over that risks of CFDs—such as counterparty risk, client money risk,
underlying asset. This means you could be left with an open CFD liquidity risk, gapping and execution risk—and these could
position that you are unable to close. result in losses you did not expect.

CFD and other market prices can move very quickly and sometimes You need to consider whether the uncertain returns from trading
they can even skip one or more price points. For example, the CFDs justify the time and effort you need to put in to assess and
price of a CFD could fall from $2.54 to $2.50 without trading at try to manage these risks. Remember, if things go wrong, your
any of the prices in between. If you had placed a trade to sell this losses could outweigh any gains you have made. Depending
CFD at $2.52, your order may only be executed at $2.50 (or less) or on the terms and conditions of your agreement with the CFD
alternatively not executed at all (depending on the order type). This provider, the potential losses are unlimited.
is known as ‘gapping’.
Gapping is a fundamental risk of trading CFDs. You may be told or
hear that a stop-loss strategy or a particular order type can mitigate
the risk of gapping. You should be wary of such advice. See our
warning on stop-loss strategies on page 32.
In addition, when you place a buy or sell order with a CFD provider
through their trading platform or over the telephone, there may be
a time lag between when you place your order and when that order
is executed (this is called ‘execution risk’). If the market for the
underlying asset moves in the time between when you place the
order and the execution of the order, this could also result in your
trade being executed at a worse price than when the order was
made, especially if markets are very volatile.

18 19
 Are CFDs right for you?

Perception versus reality ‘I didn’t realise how stressful it would be if trades were not doing
Unfortunately, many novice traders are attracted to CFDs by slick what [I] expected. What do you do, how do you cope with that?
advertising and free seminars (see ‘Tips and traps’ on page 42). Yet Because [nobody] really talks about that. They said, ‘You’ve got to
people who have traded CFDs point out that CFDs are not ‘get rich manage your risk’, but what does that mean?’ – CFD trader
quick’ products.
People who have traded CFDs say that novice or beginner investors
should not start by trading CFDs. These products do not suit people
who are risk averse or conservative in their investment style.
What’s at stake for you?
You should only consider trading CFDs if: If you are thinking about trading CFDs, here are
• you have extensive trading experience some questions you should ask yourself:
• you are used to trading in volatile market conditions, and •  ow much experience do you have trading
H
• you can afford to lose all of, or more than, the money you put in. shares? Do you understand the differences between investing
in shares and trading CFDs?
The following table compares the expectations people might have
before they trade CFDs with the reality of trading CFDs. •  hat are your investment goals? Does trading CFDs fit in with
W
those goals?
Expectation Reality • How much risk are you willing to take when investing?
CFDs are easy to CFD trades need to be regularly •  ow much of your investment portfolio are you looking to put
H
trade and don’t monitored. into trading CFDs?
require a lot of effort.
• If your trading goes badly, do you have extra money or assets
CFDs generate high  eople who trade CFDs often suffer
P to cover any losses?
returns. trading losses. Large returns on individual
•  ow much experience do you have with other speculative or
H
trades are often counterbalanced by
volatile investments? Is it enough?
losses on others.
• How much experience do you have in borrowing to invest?
Trading CFDs is  hile CFD trading platforms are similar
W
similar to online to those for online share trading, the •  ow much time can you devote to trading CFDs and
H
share trading. nature and risks of trading CFDs are quite monitoring your trades? Will it be enough?
different. • Have you read and do you understand the PDS for the CFDs?
Education seminars  eople who attend education seminars
P •  o you have a plan to monitor and manage the risks of
D
will provide the before trading CFDs still have to learn a trading?
necessary skills for significant amount about the products
•  ow well could you cope psychologically with wide swings in
H
trading. while trading.
returns on trades?

20 21
 Not all CFDs are the same

CFD provider business models What are market maker and direct market access CFDs?
If you decide to open an account with a CFD provider, you should With these OTC CFDs, you enter directly into an agreement with the
know what the provider’s business model is (that is, how they CFD provider to trade CFDs. The term ‘OTC’ refers to the fact that
structure and price their CFDs). In Australia, there are three types each provider has their own CFD terms and conditions, and that
of business models: ‘market maker’, ‘direct market access’ and the CFDs are traded directly between clients and the CFD provider,
‘exchange-traded’. rather than on an exchange such as the ASX. CFD providers may
Market maker and direct market access models are both provided issue OTC CFDs either via the market maker or the direct market
over-the-counter (OTC) and are the most commonly available access models.
CFDs in Australia and overseas. Several CFD providers offer both Market makers quote their own prices for all CFDs they offer. The
market maker and direct market access CFDs, so you need to pay price offered may or may not diverge significantly from the market
careful attention to what type of CFDs you are buying or selling for price of the underlying asset. People who trade CFDs are expected
any trade. Exchange-traded CFDs are provided by the Australian to be price takers (rather than price makers as for the other
Securities Exchange (ASX) and this model is unique to Australia. business models). Market makers may or may not hedge client
In all cases, the CFD provider determines the underlying assets positions with other counterparties or in the underlying market
on which CFDs may be traded. They also define the terms (see ‘Questions to ask the CFD provider’ on page 26 for more about
and conditions of the client agreement, including the margin ‘hedging’). This means that the CFD provider may directly benefit if
requirements for client accounts (see page 30). you lose on your trade.

The following table summarises the features of each model. Market makers tend to offer more CFDs than other providers as
they can write CFDs against ‘synthetic’ assets (for example, an
index) or against real assets, even if there is little or no liquidity in
Market maker In a market maker business model, the CFD
the market for the underlying asset, or a market does not exist.
model (OTC) provider comes up with their own price for
the underlying asset on which the CFDs are The CFD prices of direct market access providers correspond
traded. directly to the prices of those assets in the underlying market.
These CFD providers automatically place each client order into
Direct market In a direct market access model, the CFD market for the underlying asset, so people who trade CFDs are
access model provider places your order into the market for price makers. The CFD providers do not carry any market risk from
(OTC) the underlying asset. The price you pay will the trade. As a result, these providers will only offer CFDs over an
be determined by the underlying market. asset if there is sufficient trading volume in the underlying market.
Exchange-traded In the exchange-traded model, you are
model (ASX) trading CFDs that are listed on the ASX.
ASX exchange-traded CFDs can only be
traded through brokers authorised to trade
these CFDs.

22 23
 What are ASX exchange-traded CFDs?
ASX exchange-traded CFDs are listed on the ASX. They are traded What’s at stake for you?
through brokers authorised by the ASX to deal in these CFDs. The In the market maker business model, the CFD
CFD terms and conditions are standardised by the ASX, which provider determines their own price for the CFDs
reduces some of the risks. The market for these CFDs is separate to they offer, which may be the same as the market
the market for the underlying assets. price for the underlying asset, or may involve an extra margin
In the exchange-traded model, CFD prices are determined by on that price (known as a ‘spread’). This means you must accept
trading activity in the CFD market, and people who trade CFDs whatever price the CFD provider makes for the underlying asset
may be price makers. CFD prices closely follow the market price of (or other products) on which you are trading. The CFD provider
the underlying asset, although there may be divergence if there is can also reserve the right to re-quote prices after you have
limited liquidity in the CFD market. submitted an order.

ASX 24 (formerly the Sydney Futures Exchange), which is part In the direct market access business model, the CFD provider’s
of the ASX Group, is responsible for registering, clearing and prices match those in the underlying market. But if there is not
processing all trades in ASX exchange-traded CFDs. ASX 24 acts much trading in the underlying market, you may not be able to
as a counterparty to these transactions, which means that both open or close CFD trades when you want to. These providers
the buyer and the seller contract with ASX 24 and not directly with also tend to offer fewer CFDs than market makers.
each other. This significantly reduces counterparty risks you are In the exchange-traded model, you can’t directly trade ASX
exposed to. For more about counterparty risk, see page 14. exchange-traded CFDs yourself. This means you must open
ASX exchange-traded CFDs are regulated by ASX Group and ASX an account with a broker authorised to trade these CFDs.
24 operating rules and ASIC market integrity rules. However, the counterparty risk is less. Check the ASX website
at www.asx.com.au for a full description of how ASX exchange-
traded CFDs work and a list of authorised brokers.

24 25
 Questions to ask the CFD provider Q: When processing CFD trades, does the CFD provider enter into a
It can be difficult to figure out which business model a particular corresponding position in the market for the underlying asset?
CFD provider uses. Ask the CFD provider these questions, or look CFD providers using the direct market access business model
for answers in the PDS, to work out which model they use and promise to ‘hedge’ all client trades in the underlying market.
what it means for you. This means that when you place a CFD trade, you should be able to
Q: What is the financial position of the CFD provider? see the corresponding trade being placed in the underlying market.
This makes the CFD pricing and trading process more transparent
To adequately run their day-to-day business, a CFD provider must
for people trading CFDs, although it limits the number and types
have enough capital and cash flow. Don’t take glossy advertising
of CFDs that can be traded. Even though the order is placed in the
and a slick website as a sign that the provider is financially secure.
underlying market, it doesn’t mean that you own or are entitled to
Wherever possible, check the facts by reading the provider’s
the underlying asset, and you are still subject to counterparty risks.
financial statements if they are available.
Market maker CFD providers may also hedge the CFDs they offer,
Q: What is the CFD provider’s policy on the use of client money? but these arrangements are generally less transparent than for direct
The law sets down some requirements for how CFD providers deal market access providers. Market makers may not hedge all the CFD
with your money. Not all CFD providers handle and use client money trades you place, and so may directly benefit if you lose on your trade.
in the same way. Some providers give your money more protection
than others, so make sure you find out what a CFD provider’s policies For all OTC CFD providers, make sure you read the PDS or ask the
are, and check how they compare to other providers. For more provider about their hedging policy, including what will happen to
information on client money risk, see page 17. your trades or your account if the hedging fails. If a provider only
hedges with one company, this can significantly increase the risks
Q: How does the CFD provider determine the prices of CFDs for you.
they offer?
CFD providers should let you know how they arrive at their CFD Q: If there is little or no trading going on in the underlying
prices. Some OTC CFD providers’ prices mirror the price of the market for an asset, can you still trade CFDs over that asset?
underlying asset (direct market access providers). Other OTC CFD Being able to make trades even if there is little or no trading going
providers (market makers) may add an extra amount (‘spread’) to on may be useful if you have an open CFD position that you want
the underlying market price. The spread may be fixed or may vary. to close. However, in these circumstances, CFD providers are very
likely to apply wider spreads or re-quote on CFD trades, which can
The pricing of CFD providers who use the direct market access model
affect your trading bottom line. Also, most CFD providers reserve
is more transparent, but they may offer a more limited range of
the right refuse to accept trades, so you can’t rely on being able to
CFDs. CFD providers who determine their own prices generally offer
trade in these circumstances.
more CFDs, but you need to consider the impact of wider spreads
and the possibility of re-quoted prices on your trading profits. Q: Does the CFD trader let you trade CFDs even if the underlying
Prices for ASX exchange-traded CFDs are determined by trading on market is closed?
the ASX CFD market, which is transparent. While it might seem good to be able to trade whenever you want,
there are additional risks involved if the CFD provider lets you trade
Q: Can the CFD provider change or re-quote the price after you
when the market is closed. When the underlying market is closed,
have already placed your order? you can’t check how CFD prices compare to market prices, which
Some CFD providers reserve the right to re-quote prices to you after could result in price distortions.
you have placed your order. While these CFD providers tend to offer
a wider range of CFDs than other providers, re-quoting of prices by
providers can affect the profitability of your trades.

26 27
 Trading essentials

How you trade CFDs depends on the CFD provider. The terms and Fees and charges (including interest)
conditions of client agreements vary widely and can be structured You must pay the CFD provider fees and charges to trade CFDs.
in many different ways.
In all cases, CFD providers will charge you for each order that you
It’s especially important to understand how the CFD provider place on their trading platform. This charge may vary from provider
handles trades, including what trading platform they use and what to provider.
you’ll be paying to trade.
In most cases, CFD providers will also charge you for additional
For more about CFD trading jargon and what it really means, see information or research data, such as data on ASX or foreign
page 38. market shares. Some CFD providers may tell you that you have
access to certain information free of additional cost, as long as
CFD trading platforms you make a certain number of trades per month. But remember,
you are still paying for those trades.
A CFD trading platform is the system a CFD provider uses to allow
you to make CFD trades. As well as fees and charges for trading, the CFD provider will
charge you interest on any long CFD positions held open
Usually, when you open an account with a CFD provider, you
overnight. Often interest is charged on the full face value of
are given online access to their trading platform. You log on to
your trade. The interest rate you are charged will vary depending
the platform and place your buy and sell orders. The platform
on the CFD provider.
also provides you with a suite of research tools and certain kinds
of information, such as data on the way underlying assets are The PDS and the terms and conditions of the client agreement
performing in the market. should clearly set out all fees and any other charges. It should also
clearly set out how interest will be charged on any leveraged trade.
CFD providers each have their own particular platform. Some may
While it may not indicate a specific amount, it should give you
be physically easier to use than others. Some CFD providers may
a method for calculating the interest and explain how and when
offer telephone or mobile phone services through which you can
interest is charged.
place buy and sell orders.
Make sure you understand what you are paying for and how you
You must do your own independent research on the quality of
will be charged. Keep records of what you pay. If you have any
the trading platforms that are currently available. If possible, you
complaints or disputes about fees and charges that you can’t
should trial a CFD provider’s platform before opening an account
resolve with the CFD provider, contact the provider’s external
(see page 43).
dispute resolution scheme (see page 45).

28 29
 Margin requirements Margin calls and liquidation
To open a CFD trade, you need to pay a margin, which will be a A CFD provider will make a margin call when you have a CFD trade
percentage of the total value of the trade. For example, if you buy or trades open which have lost money, and there is not enough
a CFD over XYZ shares, you may need to pay a margin equal to 5% cash in your CFD trading account to cover this loss.
of the current XYZ share price. The initial margin amount will be
The CFD provider may contact you, either by telephone or by email,
withdrawn from your account by the CFD provider when you place
to alert you to your margin call requirements and to ask you to
the trade.
put extra money in. However, they are not obliged to do so. Many
Different CFD providers will have different margin requirements providers expect you to monitor your account regularly and so may
for CFDs over the same underlying asset. Margin requirements will not notify you of a margin call.
tend to be higher for CFDs over shares than for other assets.
If you get a margin call, you will usually have to pay in extra money
Even if you shop around for the lowest margin rates, you need to that same day, or face automatic closing (called ‘liquidation’) of
remember that regardless of how little margin you pay, you are one or all of your trades.
always responsible for the full face value of the trades you make.
Paying less margin upfront means that small price fluctuations can CFD providers will also usually set a ‘liquidation’ level on your CFD
have a bigger impact on your trades. trading account. This is the level at which any open CFD trades
will be closed if you do not have enough money in your account
For example, if you have a trade open and the market moves against to cover adverse movements on your trades. CFD providers may
you, the CFD provider may demand that you pay an additional express this level as a percentage, say 10–20%, of your margin
margin to keep the trade open. If you have cash in your trading requirement.
account, this additional amount will be automatically debited.
However, if you don’t have enough money in your CFD trading For example, you might be required to keep $1,000 in margin. If
account, the provider may make a margin call demanding extra the balance in your account goes down to $100 (at 10% liquidation
funds. level), the CFD provider may liquidate your open trades, as well as
charging you a fee (penalty) for the liquidation.
The PDS and the terms and conditions of the client agreement
should clearly set out margin call procedures and your rights and
obligations. It should also set out the circumstances in which the
CFD provider will liquidate your trades.

30 31
 Stop losses
A stop loss is a trading strategy that may mitigate some of the What’s at stake for you?
risks involved in trading CFDs. Most CFD trading platforms will The way a CFD provider operates—and the terms
allow you to set a stop-loss price at which you will be automatically and conditions of a particular client agreement—
closed out of an open trade. This means that if the underlying asset can have unexpected consequences:
on which you are trading reaches a certain price, your trade will be
closed out. •  or example, people who trade CFDs have reported problems
F
with some trading platforms that are currently available,
Relying on a stop-loss strategy can be risky. Even if you have set including delays in the execution of buy and sell orders.
a stop-loss price, the CFD provider may not always execute your This means market conditions might change and you could
stop-loss at the price you have set. lose out.
This will only be the case if you have a ‘guaranteed stop loss’. •  ven if you’re thinking of accessing a trading platform via
E
When you set a guaranteed stop-loss price, the stop-loss will mobile phone, remember that mobile phone connections to
always be executed when the underlying asset reaches your set the internet are notoriously slow and prone to connectivity
price. This is a premium service for which CFD providers charge a issues. Don’t be fooled into thinking that trading on your
premium price. mobile phone will make trading easier.
You need to read the PDS and the terms and conditions of the client •  heck what the CFD provider will do in the event of a margin
C
agreement to understand the stop-loss options for a particular CFD call. Margin calls can be very stressful events and often you
and what you might risk if stop-loss orders aren’t guaranteed. are only given a short amount of time to transfer extra money
to cover the margin call. If you can’t quickly transfer extra
‘Dividend’ payments funds, the CFD provider may automatically close (‘liquidate’)
your open CFD trades to prevent losses escalating, although
If you buy shares in a company, you normally receive dividends on
you will still be liable for any losses incurred.
those shares. If you trade CFDs over an underlying asset, you are
not buying that asset itself. However, CFDs are designed in such a •  FD providers often reserve discretion to liquidate your trades
C
way so that you still receive some of the benefits of ownership. without warning if your CFD trading account is in deficit. If the
CFD provider keeps your trades open, even when they have
When you buy a CFD over an underlying asset, your CFD trading
run into losses that cannot be met by your margin, you will
account will be credited with a certain amount of money that
lose more money than if the trades had been liquidated.
mirrors what the owner of that asset (for example, a shareholder)
would receive as a dividend payment. Before you sign any agreement, ask the CFD provider to clarify
their policy and procedures on these important points.
On the other hand, when you sell a CFD over an underlying asset,
your CFD trading account will be debited with a similar amount,
which is paid to the counterparty.
Make sure you read the PDS and the terms and conditions of the
client agreement so you understand how and when dividend
payments are made to you and when you must pay them.
32 33
 Do your own research

Trading CFDs is time consuming and requires significant research, What information is available through the
diligence and patience. CFD provider’s website?
Regardless of how you trade CFDs, it’s important to understand the All CFD providers put information about CFDs on their websites.
features and risks of the product before you trade. A good place to The PDS and any other disclosure information on the CFDs should
start is the Product Disclosure Statement (PDS). But make sure that also be available on the website, although this information can
the PDS is up-to-date: be difficult to locate. If you cannot easily find the information you
need, contact the CFD provider.
•  or ASX exchange-traded CFDs, check with the broker that the
F
ASX has authorised them to deal in these CFDs, or contact the Information about ASX exchange-traded CFDs can be found on
ASX directly. the websites of brokers that the ASX has authorised to trade these
CFDs, and on the ASX website at www.asx.com.au.
•  or OTC CFDs, check with the CFD provider that the PDS
F
is current and ask if they have issued any supplementary
disclosure information. What information is provided at seminars?
You should also read closely the terms and conditions of any client CFD providers often hold free seminars to promote their products.
agreement to trade CFDs and any other relevant information on the You might see advertisements for these seminars on a provider’s
CFD provider’s website. website or on television or in the financial press. CFD providers
promote these seminars as ‘information’ or ‘education’ seminars.
Some CFD providers issue many documents, including the
mandatory PDS and a Financial Services Guide (FSG). Certain The information provided at these seminars does not always give
providers will take some or all of these documents as forming part you a complete picture about how difficult and time consuming
of the terms and conditions of their agreement with you. This might trading CFDs can be. This information is also unlikely to fully
mean that the rights and obligations set out in some or all the reflect the risks involved in trading CFDs, including margin calls,
disclosure documents will determine your rights and obligations counterparty risks (especially for OTC CFDs) and technical issues
when dealing with the CFD provider. with trading platforms.
As part of your research strategy, carefully assess the information
you receive from CFD providers and ask them for more information
and clarification if necessary. Avoid being drawn in by any
promotional deals offered to attract clients, such as mobile phones
or other benefits given for signing up on the spot (see ‘Tips and
traps’ on page 42 for more about promotions).
Above all, never rely solely on the information provided at a
seminar to make a decision about trading CFDs. The presenters
at a seminar do not know anything about your financial situation
or goals. They are not in a position to recommend CFDs to you.
It is up to you to check the PDS and do your own research before
deciding to trade CFDs.

34 35
 What about recommendations from family or friends? Some people find the PDS hard to read and understand. It is very
If you are thinking about trading CFDs, don’t rely on word-of-mouth important that you carefully read all the sections of the PDS that
from family or friends. Just because a family member or a friend explain:
has successfully traded CFDs does not mean that you will have the • the CFD provider’s business model and trading platform
same experience.
• the underlying assets you can trade
CFDs are not an investment like shares. You do not buy and sell
• fees and charges (including interest)
a CFD in the same way that you would a share. While it might be
tempting to trust your family, friends or colleagues, it is always • how the CFD provider handles counterparty risk
preferable to do your own research about trading CFDs.
• trading strategies such as gapping and stop losses
• the CFD provider’s policy on margin calls and liquidation
Why is the PDS important?
The PDS from the CFD provider contains important information • dividend payments
that you must read and understand before deciding to trade CFDs, • how the CFD provider handles client money, and
either over-the-counter or through an exchange.
• complaint and dispute procedures.
The PDS tells you how the particular CFDs work. It should tell
you everything you need to know about the CFD provider and the You should check that you can find all of this information
trading platform they use. It should also tell you about the risks of prominently displayed in the PDS.
trading CFDs and the terms and conditions of the client agreement. A ‘PDS in-use’ notice must be lodged with ASIC before a PDS can
be used by the CFD provider. However, this does not mean that
ASIC has checked or endorsed the product or the CFD provider in
any way.

36 37
 How to read a PDS and other disclosure documents Risks
Highlighted below are the most important issues to check in a What to look for Things to consider
PDS or other disclosure document, with an explanation of what
The PDS should clearly explain •  o you understand all the
D
to look for and some things you should consider.
the risks involved in trading CFDs. risks that are discussed?
PDSs and other disclosure documents for CFDs vary widely It should also explain any specific
•  re there any strategies
A
depending on the CFD provider. This is only an indication of the risks that apply to the particular
that can be put into place to
important information to look for. type of CFDs the provider offers.
manage those risks?
These risks include the risk of
losing all of (or more than) the • If a worst-case scenario
Provider
money you put in, the risk of happened, could you cope
What to look for Things to consider margin calls, liquidity risk and with losing much more
The PDS should state clearly •  hich company is actually
W counterparty risk. money than you invested?
who the provider is—that is, the providing the CFDs?
company providing (or ‘issuing’) Fees and charges
• Is there enough information
the CFDs. A company will
about the history, What to look for Things to consider
sometimes offer CFDs created
performance and financial All CFD providers charge you •  o you know which fees are
D
by another company (this is
strength of the provider? to trade CFDs on their trading compulsory and which can be
known as ‘white-labelling’).
platform. Fees and charges may avoided?
include:
Key product features •  o you have to pay data and
D
What to look for Things to consider • c ommissions on trades software costs even if no
• interest and financing charges trades are made?
The PDS should explain how •  oes the provider offer CFDs
D
CFDs work, what CFD products as a market maker, or by • rollover charges •  re there any account
A
the provider offers, and how direct market access or do • interest charges applied to debit inactivity fees?
they operate. It should also they offer ASX exchange- balances in your account
•  re there any fees for
A
summarise key product features traded CFDs? • exchange fees
transferring money in or out
such as minimum account • guaranteed stop-loss premiums of your CFD trading account?
• 
What discretions does the
balance, minimum trade size, • data and software fees
CFD provider have (for
trading hours and so on. The • account keeping fees
example, in accepting trades
provider may also discuss what • administrative charges.
or quoting prices)?
they see as the key benefits of
trading their products. •  o the potential benefits of
D
Types of accounts
trading CFDs outweigh the
risks for you? What to look for Things to consider
You must open an account with a •  oes the CFD offer an account
D
CFD provider if you want to trade type that suits you?
CFDs. The PDS should explain
the different types of accounts
offered and the process for
opening an account.

38 39
 Trading CFDs Margin requirements
What to look for Things to consider What to look for Things to consider
CFD providers allow you to •  o you understand any
D CFD providers may require •  hat are the margin
W
execute trades on their trading discretions the CFD provider different levels of margin requirements for the CFDs
platforms, usually by placing has? depending on the CFD or to be traded?
orders over the phone or online account type.
•  o you know how to track
D •  an the margin requirements
C
using the provider’s trading
trades and open CFD positions? change after a trade is
platform software. The PDS
opened?
should explain how you can •  re there are any circumstances
A
make trades. where the provider will close Margin calls
their CFD market?
What to look for Things to consider
Types of orders The PDS should explain what •  o the CFD provider’s policies
D
the CFD provider’s processes on margin calls suit you?
What to look for Things to consider
are for making a margin call,
 he PDS should outline the
T •  o you understand the different
D •  ill you have extra money
W
including whether they will
different types of orders the types of orders? available if you need to cover
contact you directly about the
CFD provider offers. These may a margin call?
•  hat are the costs for different
W margin call, how long you will
include ‘market orders’, ‘limit have to meet the margin call, •  hat might you risk if you
W
orders?
orders’, ‘contingent orders’, and any other discretion they can’t find the money (e.g.
and stop-loss orders. The PDS • Is it possible to change or have to close out your trades if a would you be putting other
should also explain whether the cancel orders after they have margin call occurs. assets, such as your house,
CFD provider offers both long been placed? What are the at risk)?
and short orders and in what costs?
circumstances. Client complaints
• If the CFD provider offers
stop-loss orders, are they What to look for Things to consider
guaranteed? The PDS should explain how •  re the CFD provider’s
A
•  o you understand how to
D the CFD provider handles client processes for dealing with
close out your position on a complaints and disputes (see client complaints fair and
CFD? page 45). clearly explained?

Client money Tax implications

What to look for Things to consider What to look for Things to consider
 ow the CFD provider can and
H •  oes the CFD provider clearly
D The PDS should explain the tax •  ave you sought professional
H
cannot deal with your money explain what they will and implications of trading CFDs. advice about the specific tax
is regulated by law. The PDS won’t do with your money? implications for you of trading
should make it clear how the CFDs?
•  hat are the implications of
W
CFD provider complies with
their policies for you?
these requirements.
•  ill you be affected if other
W
clients suffer losses they cannot
pay?

40 41
 Tips and traps

CFD providers are increasingly promoting their products to Make sure you have the time and money to trade CFDs
Australian investors on websites, in the financial press, on Trading CFDs is not a passive activity.
television and in free information or education seminars.
People who trade CFDs say that trading takes a lot of time and
If you are interested in trading CFDs, you need to evaluate any concentration and that they underestimated the amount of time
promotional material very carefully, especially advertisements and that was required to trade, monitor trades and maintain their
information provided at free seminars. accounts.
Here are some tips and common traps. Given that you are potentially putting very high amounts of your
own money at stake when trading CFDs, you can’t afford to be
Trial the CFD provider’s trading platform before signing up casual about trading.
There are many CFD providers operating in Australia and they each Unlike betting, the potential for losses in trading CFDs is far greater
have a unique CFD trading platform. than your initial stake. When you place a bet on a horse, you can
only ever lose the amount of money you put on the bet. With CFDs,
CFD trading platforms are not perfect systems. People who trade
you can lose much more than you put in because you have to pay
CFDs often experience technical problems that negatively affect
for any losses which exceed the margin you put up.
their trading (for example, delays in executing orders during which
time the market has moved). While most people can meet margin calls of $100, ask yourself if
you could meet a margin call of $1,000 or $10,000, or even $100,000
Some CFD providers allow you to open a trial account for a limited
on bad trades.
time. These trials should be cost-free and obligation-free. This can
be a good way of gaining an understanding of the general logic
and process of trading CFDs on an online trading platform.
If you trial a platform, remember that you are not trading in real-life Do your homework
conditions. You are likely to take greater risks because you know
you are playing a game and are not risking any real money. CFDs are a complex and high-risk product.

However, if you take the game seriously, observe and study the Even highly skilled and knowledgeable traders
way the trading platform works or doesn’t work and take note of with extensive experience (not just with CFDs but
your own behaviour. also with the underlying assets of CFDs) usually only trade CFDs
as one part of their investment portfolio, often to hedge their bets
If you don’t enjoy the trial experience, it is probably safe to assume across a range of investment options. As well as understanding
that you will not enjoy the real thing. If you consistently fail to CFD trading strategies, they also have the time and resources to
make any gains in the trial runs, think carefully about whether you keep close watch over the market.
are likely to do better with the real thing.
Unless you feel confident that you have the time and patience to
build your knowledge and skills over a long time before taking
any risks, CFDs may not be the best product for you.

42 43
 Don’t fall for pressure selling or promotional gimmicks
You should never sign up to trade CFDs unless you have read
Misleading advertising?
and understood the PDS and other disclosure documents, and
preferably only after you have seriously trialled a CFD trading
Hard sell?
platform. Have you come across an advertisement for a financial product that
you think is misleading?
Often CFD providers will promote their products with seductive
language at free seminars and on their websites. Some CFD Or have you been pressured by a sales person to make a decision
providers may focus only on the benefits of trading CFDs, and may when you didn’t have enough information, or weren’t sure that the
even claim that trading CFDs is easier and more rewarding than product was right for you?
trading shares.
Go to www.fido.gov.au/hardsell for some strategies to help you
You should never feel obliged to sign up to trade CFDs, no matter resist pressure selling. Make sure you don’t end up investing in a
how much time and effort the CFD provider has put into explaining financial product that doesn’t suit your needs.
their product and trading platform to you. You have no obligation
to sign anything at any time.
As part of their marketing, CFD providers will often offer gifts or
limited deals to attract new clients. In the past, some CFD providers
How to complain
have offered mobile phones or gadgets. Similarly, they might offer Under the law, you have the right to complain if you are not happy
you a discount on some fees and charges for a limited period if you about any aspect of a financial product or service including a
sign up with them immediately. bank, building society or credit union account, insurance policy,
superannuation, investments or any financial advice you receive.
CFDs are a complex product with high risks. They are a serious
business with potentially very high stakes. When confronted Go to www.fido.gov.au/complain to find out more. You can lodge a
with the opportunity to gain a free gadget or discounted fees and formal complaint online or phone ASIC on 1300 200 630.
charges for a limited time, think carefully about the real benefits
All CFD providers must also be a member of an ASIC-approved
of such upfront offers. They may cost you more than you ever
external dispute resolution scheme. These schemes are:
imagined.
•  inancial Ombudsman Service (FOS)
F
www.fos.org.au or phone 1300 780 808
•  redit Ombudsman Service Limited (COSL)
C
www.cosl.com.au or phone 1800 138 422.
Check the PDS or the CFD provider’s website to see which scheme
they are a member of.

44 45
ISBN 978-0-9805533-1-4
© Australian Securities and Investments Commission, November 2010
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