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Q&A: CFDs

Q. A friend of mine has talked me into CFDs and I have a $40,000 exposure to them. What do you think about them?

Ben, Crows Nest, NSW.

A. CFD stands for contracts for difference and they are not a straightforward product for the novice.

People like CFDs because you can trade shares and other financial products with a lower outlay and cost than say buying the actual shares. With CFDs you can trade local and overseas shares, gold, oil, foreign currencies, and indices.

You can get into a CFD for 5 to 10 per cent of the share price at the time you take the position. The outlays for CFDs over market indexes can be as little as 1 per cent of their value. And you can go short or go long and that is often an attraction.

With a CFD provider, he or she agrees to give you any profit you make as the difference between owning the investments and having an interest in a CFD. It’s great when the trade works for you, but you must know what happens and how much you must come up with if the trade goes against you.

Plenty of people have made good money out of CFDs, but in volatile times there can be big swings on the market. Make sure you research the pros and cons of CFDs and be aware of what might happen if the market or the share drops 10%, 20% or even more. By knowing what can go wrong, it might make you more careful with these tricky instruments.

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Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

 

Published on: Monday, August 03, 2009

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