A History of CFD Trading
The founder of CFDs trading is debated heavily and to this day people cannot agree on who really created this popular derivative. What people do agree on however is that CFDs originated in London in the early 90s. It is widely held that a financial services firm came up with the concept as a way to hedge or offset their risk from shares traded on the London Stock Exchange. CFD popularity was due to the fact that they didn’t require a large margin, no actual shares was changed hands and those dabbling in the instrument were able to avoid taxes such as capital gains. It wasn’t until the late 90s and the dot com boom’s dramatic rise in online trading that CFDs began to be traded by retail traders as a nouveau investment tool. It is no coincidence that the ease of trading brought about by the internet coincided with the dramatic growth of CFD trading, especially in Australia.
When Did CFD Trading Australia Start?
Similar to other fads and technologies which take some time to arrive on Australian shores, CFD trading Australia didn’t really commence until roughly 2002. Australia’s addiction to trading meant CFDs were perfect for the Aussie market and in just a short space of time the CFD trading Australia market grew to nearly 50,000 active traders. Just five years later in 2007, Australia was the first country in the world to offer exchange tradable CFDs. Typically CFDs are OTC or over the counter, meaning you trade directly with a counter-party with one winner and one loser ensuing.
OTC CFDs VS Exchange Traded CFDs
Many people ask what the benefits of trading CFDs on an exchange versus over the counter are. While there are some downsides, exchanged traded CFDs far outweigh CFD trading Australia over the counter. To begin with CFDs traded on an exchange are strictly regulated meaning they are much fairer and all activity is completely transparent. Counterparty risk, which is an assessment of how prone a counterparty to a contract is to insolvency or default, is also kept to a minimum when an exchange is factored in. On the other hand, CFD trading Australia on a regular exchange incurs a bit of a premium due to the aforementioned advantages. Furthermore, there is only a finite number offered on Australian markets which also causes prices to spike.
Is CFDs Trading Legal In All Jurisdictions?
You’ll often find that CFD trading is legal in most market places where they are regulated. However, CFDs are not legal in all countries with the USA at the top of the list of countries where CFDs trading is not endorsed or regulated. In the United Kingdom CFDs are regulated by the Financial Services Authority (FSA). The FSA are actually quite strict and as of 2009 require greater disclosure obligations in order to avoid insider trading. Like the UK, CFD trading Australia is also very popular and is regulated rigorously by the Australian regulator. Some other countries that boast CFDs trading include Austria, Canada, France, Israel, Germany, Japan and South Africa just to name a few.
Types of CFDs Available For Trading
CFD instruments are incredibly diverse and span a wide range of asset types. Common instruments traded include shares Forex, commodities and treasury notes. The overall benefit of being able to trade CFD derivatives in these markets is that it reduces the confusion or complexity of trading. Trading costs are also lower and the access it provides retail traders is unbelievable considering historically, a number of these derivatives were only ever offered to institutional firms.
The types of CFDs online brokers may offer include
- Global Stocks / Share CFDs – This is the most commonly traded CFDs
- Stock Index – ie FTE, NIKKEI, NASDAQ, Dow.
- Industry Sector – ie Banks, Technology
- Foreign Exchange
- Soft Commodities – ie. Agricultural Products such as Coffee, Sugar, Wheat, Corn, Soybeans or Live Stock such as Pork, Cattle)
- Hard Commodities – ie. Metals (Gold, Silver, Copper) and Energy (Gas, Oil, Uranium).
Can I Access Foreign Share Markets With CFDs?
This is perhaps one of the greatest benefits of CFD trading Australia. Ever had a conversation with your friends about wanting to purchase stocks overseas? The biggest companies in the world operate out of the United States. Dreamt of taking advantage of the returns shares in Apple, Google or even Facebook offer? Typically it has been quite costly and almost impossible to purchase foreign equities. However, CFDs makes it possible even when you don’t have direct foreign market access.
In Australia, if you wanted to acquire US shares in your trading portfolio, you could expect to pay close to $50 per trade making it a lot more expensive compared to trading with Australian shares. You’ll also only be able to purchase shares in a select number of US companies. With CFDs, the share trading of American stocks is available to you at the touch of a button via the brokers cfd platform.
A Summary of CFD Trading Australia
This article has gone through the brief but interesting history of CFDs. CFDs differ greatly by region, broker and especially by level of regulation. Smart cfd trader will ensure they use a cfd broker regulated by the English Financial Services Authority (FSA( and the Australian Securities Investment commission as these are considered the strictest of regulators meaning your investment is better protected and explains why CFDs speculation in the UK and Australia is especially popular. It is easy to get sucked into the hype surrounding CFDs considering its immense popularity. Many people also think that just because trading online at the touch of a button is easy, successful CFD speculation is simple too. This is a big misconception and one the team at Compare Forex Brokers has tried to dispel for a long time. Trading any derivative or financial products from CFD to Options carries immense risk as these products are traded with high leverage. The most important thing is to know your limits. Don’t risk all the money in your trading account, especially if you’re not a completely confident trader. This especially true for leveraged products meaning you are trading with cash in excess of your deposited amount. CFDs are highly beneficial but with anything, background knowledge and practice over time are critical for CFD trading success.
Choosing a CFD broker:
If you decide to trade with CFDs, it important you make sure you understand not only the benefits of CFD trading but also understand the risks of trading involved when trading with your chosen financial instrument. We suggest researching a range of online CFD brokers and signing up for a demo account so you can develop your trading skills before committing any of your own cash for trade. A good broker will not only have a demo account but provide access to a wide range of educational tools which will consist of video, e-books, e-learning tools and provide good customer service and customer support to assist you with your training. Your chosen broker will be regulated by a respected securities board such as ASIC and will be open about their spreads and transaction fees.