CFD trading is a luring option for many traders, mostly because you trade the movement in an asset’s prices without actually buying or selling the underlying asset. But the kind of profit you make from CFDs can depend a lot on the CFD trading platform you choose.
In this article, we explore how you can choose the best CFD trading platform.
What is CFD?
CFD means a contract of differences, an agreement between a trader and a CFD broker to exchange the difference in the value of a financial product between the time of opening and closing the trade. Financial products involved can be forex, shares, commodities, indices and even cryptocurrencies.
With a CFD, it becomes possible to speculate on the future prices of an asset without owning that asset. CFD traders can either gain or lose based on the outcome of their predictions.
This is how it works: If CFD traders speculate an upward movement of the price of an asset, they will go long (buy the CFD). If traders assume a fall in price, they will go short (sell their CFD position).
The difference between the purchase price and the buying price is calculated when the CFD is closed. If it’s a gain, it will be transferred to the trader’s account by the broker. If it’s a loss, it will be deducted from the trader’s account.
What is a CFD trading platform?
A CFD trading platform provided by a CFD broker enables you to trade the difference in the price movements of different financial instruments.
CFD brokers offer the CFD trading software and analytics tools required to trade CFDs. They also provide leverage to amplify your trade.
Trading with leverage means you only need a fraction of the amount you need for the CFD trade, called deposit margin, in your trading account.
The broker will supplement the amount to allow you to trade in large volumes.
What are the CFD regulations in Australia?
CFD trading is illegal in some countries like the USA because CFD is done over the counter, which means it is not conducted through regulated exchanges. Also, industry regulators are concerned about the risk of an enormous loss associated with CFD trading due to the use of leverage in the trade.
CFD trading in Australia is legal but heavily regulated. The Australian Securities and Investment Commission (ASIC) is the industry regulator. CFD trading is guided by the Corporation Act 2001 and further regulations made by the ASIC to protect CFD and other derivatives traders.
The Corporations Act requires CFD issuers and CFD brokers to issue a Product disclosure statement (PDS) to retail traders before they undertake the trade.
The PDS must disclose all reasonable information a retail investor needs to know to decide whether or not to undertake the trade. To help traders access and understand the risks of CFD trading, the ASIC has created seven disclosure benchmarks that should be followed by CFD brokers in Australia when drafting their PDS.
Effective from March 19th, 2021, the ASIC introduced new regulatory frameworks that further strengthened its CFD traders’ protection. The purpose of this new regulation is to control the loss of retail CFD traders in Australia.
The new regulatory framework covers the following;
Reduced maximum leverage
To prevent pronounced loss incurred in leveraged CFD trading, the commission reduced the maximum amount of leverage that can be granted to CFD traders from 30:1 to 500:1.
Here is the break of the leverage limit ;
- Major currency pairs: 30:1
- Minor currency pairs, gold and silver 20:1
- Major stock market indices 10:1
- Commodities other than gold, and
- Minor stock market indices 10:1
- Crypto-assets 2:1
- Shares or other assets (e.g. Treasuries) 5:1
Prohibition of promotional inducement
Brokers are prohibited from offering incentives like gifts, spread rebates and bonus credit to induce traders to open an account or persuade traders to fund their trading account. Traders can only provide incentives in the form of educational and research tools. They can also offer discounts for high-volume trade.
Negative balance and margin close-out protection
Brokers must close a trader’s trading position before all or a more significant percentage of the trader’s investment is lost. Losses incurred by traders should not exceed the fund in their account at the close of the trade.
Despite all the new regulations, the commission did not raise the Product disclosure standards.
Factors to consider when choosing a CFD trading platform in Australia
There are several CFD trading platforms. To ensure you choose the best CFD platform in Australia, look out for these qualities;
- Choose CFD brokers registered with and regulated by ASIC to enjoy the protection of the law.
- Consider brokers that give you the option to trade in several financial instruments like forex, cryptocurrency, indices, gold, silver and global stock CFDs
- Consider traders that provide varieties of good trading platforms like MetaTrader 4 (MT4), MetaTrader 5 (MT5), WebTrader and MetaTrader Supreme Edition plugin.
- Trading education is critical to your success. Consider brokers that offer a wide range of information and materials to boost your trading skills.
- You should review their terms and conditions. What is their minimum opening balance? Is their commission fee high or low? Do they charge a fee to access market data?
Blueberry Markets is a multi-region regulated CFD trading broker allowing you to trade across multiple financial instruments, including shares, cryptocurrencies, commodities, and metals. It offers a CFD trading platform with tight spreads and high leverage to make trading completely seamless for you.
A contract of difference is synonymous with a bet because it involves traders betting on either upward or downward movement in the price of a financial instrument. Just as you make an easy profit from CFDs, it is risky because the loss can be monumental.