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Is it Legal to Trade CFD in Australia?

If you are coming across CFDs for the first time, must think the idea is too profitable to be real. This is why you have decided to check whether it is a legal business in Australia or not.

To answer your question, yes, you can trade CFDs in Australia without being arrested. In fact, it is highly regulated by the Australian Securities and Investment Commission (ASIC). So, you can go ahead and learn to trade CFDs and start profiting.

In this article, we’ll help you to know everything about trading on CFDs, including choosing the best platform, the legal requirements, and much more.

CFDs in a Nutshell

Simply put, contracts for difference, popularly known as CFD, is a type of investment where you bet on the fluctuation of prices in different assets, like forex and shares. With CFDs, you profit when the value of the selected asset shifts in the direction of the contract.

The options available when you initiate a trade are long and short-term. The long option has the potential to increase in value, while the short option means there will be a decrease in value. The widely practiced trading CFDs in Australia is currencies. Also, people trade different commodities, including crude oil, gas, and iron ore.

CFDs work in a pretty easy-to-comprehend way. The contract is made between the trader and the broker, and it includes the price direction, stake, and the time it will take. The unique thing is that a trader profits whether the price of the traded asset rises or drops.

Understanding Leverage and Margin in CFD Trading

One vital element you must understand before venturing into CFD trading is leverage. Leverage is the manner in which a broker multiplies the set bet amount. CFD brokers use leverage to underwrite bigger trades than what traders can raise with their cash. Note that the leverage can escalate losses in the same way it can enhance your profits.

Another important thing in CFD trading is the margin. The latter is a percentage a trader needs to invest to initiate a trade. So, margin acts like the deposit you must make to trade. Do understand that traders cannot transact more than their margin amount.

Types of CFDs in Australia

Before you open a CFD account, it is essential to know the different types of CFDs in the Australian market. These are the three main types of CFDs:

Direct Market Access – DMA: This type includes electronic facilities that allow investors to enjoy liquidity. The investors, in this case, include banks and big brokers. The good thing about this CFD is that you are the sole decision-maker.

  • Market Maker CFD: A market maker is a company responsible for its own market and decides the price for a given asset that you can trade a CFD.  The high liquidity is what attracts many traders to this CFD.
  • Exchange-Traded: The exchange-traded model allows you to trade all CFDs on the ASX. However, this can only be done through an authorized dealer or broker. The advantage of this CFD is the counterparty is reduced.

Pros and Cons of Trading CFDs

Pros

  • Great opportunities for making huge profits.
  • Traders are protected against potential loss.
  • There is vast market access.
  • No expiry date for CFDs.
  • Traders enjoy profit from their losses.

Cons

  • Relatively complex for newbies to understand.
  • Price fluctuations can lead to big possible losses.

Choosing a CFD Broker in Australia

There are several aspects to consider when it comes to picking a CFD platform in Australia. Here are some questions you must answer before choosing a broker:

  • The regulating authority – does the CFD broker have an ASIC license?
  • Tax – what tax is paid on CFD trading?
  • Platforms – what platforms does the broker support?
  • Registration – what documents are required to open the CFD account?
  • Payments – what transaction methods and currencies are supported?
  • Assets – what tradable assets does the CFD broker support?

Choosing a legal and trusted broker in Australia can be difficult. Use trustworthy resources such as https://getfirststep.com/ to choose the best CFD broker.

The Bottom Line

As you can see, CFD trading is a legal business with the potential for making big profits. If you are a beginner, take time to research and learn before trading. You can use demo accounts to familiarize yourself with the platform features before advancing to trading with real money.