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contracts for difference (CFD)

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A high-risk, leveraged derivative contract between a client and a CFD provider. CFDs allow you to speculate on the short-term movements in foreign exchange rates, share prices, stock market index levels or other underlying assets.

Your gain or loss depends on the price of the underlying asset when the contract starts and ends. If the price moves in your favour, the CFD provider pays you. If the price moves against your CFD position, you pay the CFD provider.  

Most people lose money trading CFDs.

How a CFD works

When you trade a CFD with a provider, you're not buying an underlying asset but speculating on a price movement in an underlying asset. You agree to pay the difference between the price of the underlying asset when the contract opens and closes:

You will also have to pay transaction costs and other fees and charges to the CFD provider.

A CFD is a legally binding agreement. If the market turns against you, the CFD provider:

CFDs are not standardised contracts and every CFD provider has their own terms and conditions. You are entirely dependent on how the operator fulfils their obligations to you as the client. Read the product disclosure statement (PDS) carefully before investing.

Risks of CFDs

CFDs are complex products. Even experienced investors struggle to understand the risks involved in trading them.

Most retail clients lose money trading CFDs. Consider whether you can afford to lose your money.

Leverage can lead to large losses

CFD leverage is like trading with borrowed money. The deposit (or 'margin') you give to the provider is a small fraction of what you are borrowing to invest. 

Leveraging and trading on margin is highly risky. ASIC has applied leverage ratio limits to CFD products. Even a small price change against your CFD position can have a big impact on your trading returns or losses. You can quickly lose your entire investment.

For example, you may only have to put up $5,000 for a $100,000 contract. You are effectively borrowing the other 95%. A 5% change in the underlying asset price could mean you lose your $5,000.

Consumer protections may not apply with overseas CFD providers

CFD providers operating in Australia must have an Australian Financial Services (AFS) licence. Overseas CFD providers often don't hold an AFS licence, so consumer protections under Australian laws may not apply. Importantly, you will not have access to independent dispute resolution through the Australian Financial Complaints Authority (AFCA). So if something goes wrong, you may not be able to get help.

Wholesale clients lose consumer protections

Some firms may try to classify you as a 'wholesale client', rather than a 'retail client'. They could ask you to sign up to a 'pro-account' and speak about the benefits to you. However, if you're a wholesale client then you:

To check how you are classified, read the Product Disclosure Statement (PDS) issued by the CFD provider.