Contract for Difference (CFD)

Sonray offers clients access to a wide range of Australian and International Contract for Difference (CFDs) through our full advisory service or our award winning online platform. We have a 24 hour dealing desk to assist with execution. 

A Contract For Difference (CFD) is an over-the-counter derivative product whereby an agreement is made between a buyer and a seller to exchange the difference in value of a contract, between when the contract is entered into (opened) and when it is exited (closed).  The difference is determined by reference to an underlying instrument, most commonly a share (equity), however CFDs can also be offered over indices.  Trading in CFDs allows investors the benefits associated with trading an underlying instrument without having to physically own it. 

CFDs are a leveraged product, which allows the investor to gain market exposure while only outlaying part of the full notional value of the underlying instrument. However, leverage usually involves more risks than a direct investment in the underlying instrument and therefore it is important to understand that leverage can work against an investor as well as well as for an investor. Using leverage magnifies trading profits and losses.

CFDs are subject to other payments such as interest, dividend payments (where relevant) and fees and other costs, and therefore are not always suitable as long-term investments.  As each contract will incur costs (if you are long), there is a time when CFDs may become expensive. For short-term trading they have advantages, but as fees have the potential to outweigh profits, be prepared at some stage to cut the position.

Advantages of CFD Trading

Hedging: You can use CFDs to hedge your exposure to a position in the underlying security.

Speculation: You can use CFDs for the purposes of speculating with a view to profiting from market fluctuations, without the need to buy/sell the underlying security.

Market positions and strategies:  You can potentially profit (or suffer a loss) from rising or falling markets depending on your trading strategy. Common strategies employed include “pairs trading”, which is taking a position in two share CFDs to gain exposure to the relative market movements of each CFD. Certain strategies may be more complex than others and have different levels of risk associated with them.

Leverage: CFDs entail a high degree of leverage, and enable you to outlay a relatively small amount of money (Initial Margin) to obtain an exposure to the underlying security. Such leverage can work against you as well as for you, and lead to large losses as well as gains.

No Stamp Duty: CFDs are not subject to local Australian market taxes such as stamp duty.

Further Education

Sonray offers free online education to help you trade with confidence.