CONTRACT FOR DIFFERENCES (CFDs)

Contracts for difference (CFDs) are one of the world's fastest-growing trading instruments. A CFD - which stands for "contract for difference" - is an agreement to exchange the difference in value of a particular share or index between the time at which a contract is opened and the time at which it is closed Contracts for differences (sometimes referred as swaps or waves) allow investors to take long or short positions, and unlike futures contracts have no fixed expiry date or contract size. CFDs mirror the movement and pricing of the underlying share. A CFD allows a trader to gain access to the movement in the share price by putting down a small amount of cash known as a margin While the contract remains open, your account with the provider will be debited or credited to reflect interest and dividend adjustments. You can choose to "long" or "short" a position - if you are long, you receive dividends and pay interest, if you are short you do the reverse. Commission is paid on either side of the contract and you can close a contract at any time. In practice there is no minimum contract value though, normally, the smallest contract value will be 10,000.

http://www.asx.com.au/products/cfds/market_update/20090911.htm

CFD Trading Example To place a long trade you need to place an order to buy the CFD. Each broker will use a slightly different method to place orders but if you have bought a share before, it will be very easy to adapt to buying CFDs. To trade short, you need to place an order to sell the CFD. The mechanics of placing the order will depend on the CFD provider that you are using. Opening the position Say WXY Ltd is quoted in the market at $3.71/3.72. You think the price is due to rise, and decide to buy 10,000 shares as a CFD at $3.72, the offer price. Your initial outlay (supposing WXY Ltd is an S&P/ASX 20 stock) is just 10% x 10,000 shares x $3.72 = $3,720. The same outlay with a regular stockbroker would only give you exposure to the performance of 1000 shares. The usual commission rate on this transaction is just 0.1% or $37 (10,000 shares x $3.72 x 0.1%). Closing the position A month later WXY Ltd has climbed to $4.06/4.07 in the market & you decide to take your profit. You sell 10,000 shares at $4.06, the bid price. The commission payable is $41 (10,000 shares x $4.06 x 0.1%). Your gross profit on the trade is calculated as follows: Closing level $4.06 Opening level $3.72 Difference 0.34 Gross profit on trade $0.34 x 10,000 shares = $3,400 Note: To determine the overall profit on the transaction you would also have to take into account the commission you have paid & interest and dividend adjustments.