A Contract for Difference (CFD) is an agreement between you and a broker to exchange the difference in price of an asset from when you open a trade to when you close it. Most Australian CFD brokers offer this product across shares, forex, indices, commodities, and crypto — all without you needing to own the underlying asset.
How a Contract for Difference Works — A Practical Example
Say you believe the ASX 200 index is about to rise. You open a CFD buy position on the ASX 200 at 7,500 points, with a position size worth A$10,000. The index climbs to 7,650 points — a 2% move in your favour.
Your profit on the trade is roughly A$200 (2% of A$10,000), minus any spread and overnight holding costs. If the index had dropped to 7,350 instead, you would have lost A$200. You never owned any ASX 200 shares — you simply profited or lost based on the price movement.
Because CFDs use leverage, you only need a fraction of A$10,000 as a deposit (called margin) to control the full position. This amplifies both gains and losses, which is why risk management is essential.
Why Contracts for Difference Matter for Australian Traders
CFDs are one of the most popular trading products in Australia, but they are tightly regulated by ASIC. Under rules introduced in 2021, ASIC capped leverage for retail traders — for example, major forex pairs are limited to 30:1 leverage, while crypto CFDs are capped at 2:1. These limits exist to reduce the risk of large, rapid losses for everyday investors.
ASIC also requires that brokers offering CFDs hold an Australian Financial Services Licence (AFSL). This means Australian traders have access to protections such as segregated client funds and mandatory negative balance protection, which prevents your account from going below zero. Always verify a broker’s AFSL number on the ASIC connect register before depositing.
When a broker handles CFDs well, pricing is transparent — the spread is tight, overnight fees are disclosed upfront, and the execution is fast. A poorly run broker may widen spreads during volatile markets or impose hidden charges that eat into your returns over time.
Contract for Difference vs Share Trading
With share trading, you buy actual ownership in a company and may receive dividends and voting rights. With a CFD, you only trade the price movement — there is no ownership, no dividends, and no shareholder rights. CFDs can be traded long (buy) or short (sell), meaning you can profit in falling markets, which standard share trading does not easily allow. CFDs also use leverage, while buying shares outright requires the full purchase price. For most Australian traders, understanding the cost of leverage is the more important factor to check before choosing between the two.
What to Check When Comparing Brokers
- ASIC licence: Confirm the broker holds a valid AFSL. This ensures your funds are held in segregated accounts and you are covered by Australian consumer protections.
- Spread and commission structure: Some brokers charge a commission per trade, others build the cost into the spread. Calculate the total cost of a typical trade before committing.
- Leverage limits and margin requirements: Check that the broker applies ASIC’s retail leverage caps and clearly displays margin requirements for each asset class. Use a margin calculator to plan your position sizes.
- Overnight swap rates: CFDs held past the daily close incur a financing charge. Ask for the swap rate schedule and factor this into any longer-term trade plans.
- Platform reliability and execution speed: Brokers like Pepperstone and IC Markets are well-regarded by Australian traders for fast execution and transparent pricing across a wide range of CFD markets.
See our picks for the best CFD brokers in Australia — all ASIC-licensed, all live-tested by our team.
New to CFD trading? Our CFD beginner guide walks you through everything from opening an account to placing your first trade.
Trading CFDs carries significant risk. 70–80% of retail accounts lose money. ASIC regulated. We may earn commission via links.