Contracts for Difference (CFDs) were borne out of London’s financial district in the 1990s, derived as a means to hedge or offset potential risk from physical shares bought or sold on the City’s stock exchange.
It did not take long for CFD trading to grow in popularity across the UK and beyond, with the ability to avoid capital gains tax and other taxation on profits given that no actual shares ever changed hands – people simply traded on the value of any particular share moving up or down as opposed to owning the shares themselves.
The internet boom was what really lit the blue torch paper for trading CFDs, with retail traders increasingly acknowledging this form of trading as a potential tax-efficient investment strategy, accessible anywhere in the world. The concept of CFDs has certainly reached all four corners of the globe now. For instance, Australian investors have been able to trade in this way since 2003.
Australian retail traders were instantly attracted to the fact that they could even trade foreign equities without requiring direct access to overseas trading markets. They could simply trade CFDs by anticipating a price move north or south. CFD trading has become increasingly popular over traditional share trading as investors can also take advantage of downward price moves with CFDs; giving traders another strategy to pinpoint weak or fragile stocks to short and buy back later when the price plateaux.
Fintech made CFD stocks trading even easier in Australia and beyond, with dedicated trading platforms developed such as MetaTrader 4 giving professional and amateur investors the ability to execute CFD trades online with immense speed, while the platform’s graphs and indicators gave retail traders access to as much data at their fingertips as they would receive on a City trading floor.
Trading CFD stocks is also inexpensive in terms of brokerage, while investors don’t require huge amounts of capital in their back pocket to start. For example, someone could spend just AUS$10 to take a trading position valued at AUS$10,000. With margins set as much as five or even ten per cent of the value of any stock’s actual position, it gives retail traders immense leverage, opening up the global stock markets to a new generation of investors online.
Australia became the first nation to provide CFDs that were tradable on exchanges in 2007. CFD trading is now very well regulated in Australia by the Australian Securities and Investments Commission (ASIC), who provided a factsheet on CFDs to all potential Australian investors here.
According to a yearly publication by Investment Trends Report, there were 37,000 CFD traders active in Australia last year. Within that report, it’s suggested that the Australian CFD market is now worth more than AUS$350 million, with the number of CFD investors increasing four-fold since 2005.
There has been a slight dip in the last few years, with 43,000 CFD traders active in 2015. However, this merely reinforces the need for developing and delivering high-quality trading education programmes that engage with traders and drive further market growth. The tax-efficient nature and immense leverage available to retail traders means that CFD stocks are certainly here to stay.