All That You Wanted To Know About Share CFDs

Contracts for difference, commonly known as CFDs, are financial derivative products representing a trading contract between you and a CFD provider as the counterparty. A CFD has an underlying reference instrument and in the case of share CFDs, it is a share listed on an exchange.Trading in CFDs is similar to trading in shares and there is a huge potential for profits. As with any other high profit financial instrument, trading in CFDs is associated with an equally high potential for loss.

When you trade in share CFDs, you get a quote from the entity you are trading with. This quote will most often be the same as the price at which the underlying share is trading in an exchange. You are charged a commission on the full value of the contract that is number of CFDs traded multiplied by price. However, you do not pay the full contract value but only a percentage as margin money, which is meant to cover the risk exposure of the counterparty.

One of the biggest reasons why trading in CFDs is becoming increasingly popular in Australia is that it allows investors to trade long or short to take advantage from whichever direction you expect the price of the underlying reference instrument to move. You trade long in CFDs that you expect will show an upward movement and you go short if you expect the price to fall. 

At the same time, since CFDs are traded on margins and are leveraged products, trading in CFDs is considered to be riskier than normal share trading. Trading in CFDs without placing stop loss orders against each trade can result in a substantial loss.