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ASX CFDs
What are they?
CFDs are contracts for difference. Basically, they involve taking a bet on what’s going to happen to the value of a stock or an index – but you don’t actually own that stock. Instead, you have a contract between a buyer and a seller where you agree to exchange the difference between the value of that contract when it opens and when it closes. ASX CFDs are a range of CFDs traded on the Australian Securities Exchange; they’ve been around a while but the ASX has just expanded the range.
What do they cover?
Among other things, the top 50 stocks on the ASX; various global equity indices, such as Nasdaq, the Dow Jones Industrial Average or the Euro Stoxx 50; several major currency exchange rates; and a few commodities.
Why would I bother with CFDs instead of just buying stocks?
CFDs allow for leverage, where a small amount of money gets you a lot of exposure to a stock or index. Also, CFDs allow you to go short as well as long – that is, take a position in which you benefit when the price of a stock or index goes down.
And the risks?
Leverage works both ways: you win heavily if the stock or index moves in the way you expect it to, but lose a lot if it doesn’t. You can find yourself required at short notice to make additional payments, called margin calls, if the market starts to move against you, in order to keep a contract open. You can lose a lot more than you originally invested. However with ASX and other CFDs there are strategies you can use to protect yourself against heavy losses.
What’s special about the ASX ones?
Because they are traded on an exchange, they carry benefits of transparency (a clear price always published), liquidity (you can always buy or sell on the market) and the protection of a market that stands or falls on its integrity. Also, you can convert an ASX equity CFD position into stock.
