Trading CFDs in the Australian Market
Contracts for difference, CFDs, have been in the market for Australian investors since 2003. And during this period, CFDs have had multiple transformations and changed how investors view trading significantly. Over this timeframe, CFD trading Australia has been adopted by newcomers in the trading sector as well as existing trading experts.
Previously, you find that most share market spectators dabbled in penny shares. But thanks to CFDs, traders in Australia now have access to much higher priced shares that are no longer reserved to longer-term investors.
Investors can now buy into companies for dividends and their longer-term capital growth potential. This has made CFDs in Australia one of the most promising and fastest-growing financial products outstripping even the growth seen by warrants.
The origin and Present-Day position of CFDs
Initially, CFDs appeared in Australia in March of 2002 when CMC markets were introduced into the market. IG markets later followed closely in July 2002. Since then, CFDs have now become perhaps one of the fastest-growing financial markets to invest in in the Australian market place.
Since its inception, the popularity of CFDs reached its peak in 2007 due to its rapid interests by Australian investors and traders. At the same time, several CFD providers set up several branches in the country. This has made CFDs a big business in Australia with multiple industry estimates suggesting that there were 49,000 active CFD traders by 2015. By 2016, however, it dropped to 37,000 active users. This was still significantly high, considering that the number of CFD traders was just 9,000 by 2005. This number would then climb to 32,000 in 2009 and climb to 39,000 in 2010.
It’s, therefore, unreasonable why this growth stalled at 37,000 traders in 2016. Most market experts attributed this to two factors. These could be:
• The market turbulence — the market volatility can sometimes create opportunities and even encourage investors to trade frequently. However, if there’s too much volatility, this could drive even more traders to want to stay on the sidelines until everything calms down.
• ASIC regulations have become more onerous — this may have led to some foreign providers exiting the Australian market.
Contracts for difference are big business in Australia today with industry estimates currently projecting more than 39,000 Australian active traders currently trading the instruments. Research from Investment Trends values the Australian CFD market at $350 million. As of 2011, it was thought that the number rose to 41,000 active traders and the number kept rising. Therefore, the number increased more than fourfold, a positive outcome of the CFD market.
Different Markets Have Different Trading Patterns
It’s interesting to note that different markets and countries have different characteristics. An IG Markets’ spokesperson has, for instance, quoted claiming that Australian shares’ average holding period is approximately 3 days. Compared to the average holding periods of Singapore, for instance, which is more than 25 days, this is significantly low.
Businesses for IG Markets in Singapore has significantly grown but at a vastly disproportionate rate to its population. This may, however, be because of Singapore’s speculative culture. Compared to Germany, where the population is relatively volatile compared to, say, the United Kingdom, you would say that this is just a type of risk appetite.
Trading with CFDs
By now, you can probably tell that contracts for difference are tremendously popular in Australia. The country already claims a large per capita share ownership of CFDs worldwide. It’s even thought that nearly a third of all trading on the ASX originates with CFDs. This makes you ask yourself, ‘How do I trade CFDs in Australia?’ and can you make a profit from it?
Well, it wasn’t always this way as traders only came to consider and accept CFDs in 2001. During this time, two big brokerages, IG Markets, and CMC Markets, that were based outside the UK, were launched the next year. This resulted in a peak of CFDs’ trading activity, especially in 2007.
In contrast, CFD has earned undeserved negative press due to the market’s volatility, which caught out many unsuspecting traders. This, coupled with the recent failure of some CFD brokerage providers like MF Global and Sonray Capital Markets, has led to even more scrutiny from ASIC in respect to how these CFD providers deal with their clients’ monies.
In 2007, the ASX introduced the exchange-traded CFDs. However, the problem with exchange-traded CFDs was that traders couldn’t get the range of products they needed to use from the market maker brokers. Also, the exchange-traded CFDs were, of necessity, a lot more expensive to trade compared to those from direct market access or market makers. Obviously, there were other parties that like the clearinghouse and exchange that had to charge for their services. But with the strict regulations and compliance needed, some brokers ended up charging more than what was needed.
How Do I Trade CFDs In Australia?
One of the most critical selling points of CFD trade is how straightforward using it is. Here are some selling points traders must follow when using CFDs:
• Choose a market — you can now find several thousands of individual markets that traders and marketers can choose from. This can include currencies, bonds, interest rates, and commodities. If possible, choose a market that you understand and can relate to so that you can react to market developments as they arise.
• Buy or sell — when buying, you go long, and when selling, you go short. This is the time you bring up the trading ticket on the platform and see the current price. The selling price is the bid while the buying price is the offer.
• Trade size — here’s where you select the size of CFDs that you want to trade. A CFD allows you to control your investment’s size. Therefore, although the price of your overall underlying asset may vary, you can still decide how much you want to invest. This varies asset by asset with brokers having minimal margin requirements.
• Add stops and limits — this process helps traders and marketers to secure their profits and limit losses. Most CFD strategies help to employ the trader’s use of stop losses and limit orders. After you’ve determined your risk tolerance, it’s possible to place a stop loss that will automatically close your trade when the market hits its pre-determined level.
• Monitor and close — after you’ve placed a trade and stop of loss limits, you’ll notice that your profits also shift along with your market price. View the market price in real-time and add or close new trades.
Best CFD Trading Tips to Use
As a trader, if you’re looking to bolster your profits, then you must consider these tips. Learn from your mistakes and refrain from falling into the same expensive pitfalls. Here’s what you should watch out for:
i. Control Your Leverage
This is your greatest asset when looking to make the right trade. Most traders always face the temptation to increase their position sizes, especially when wining is difficult to resist. But then, there’s always loss on the horizon to watch out for. You, therefore, don’t want to end up being the small account trader who turns into a huge account. Then end up back at square one since you didn’t play smart.
Start small and keep your exposure relatively low in comparison as well. Don’t leverage more than what your account size can handle, particularly at the beginning.
ii. Keep A Journal
You may also need to swap out descriptions for entry and exit points, position size, price, and so on. CFD trading journals are usually overlooked. However, their use will always improve invaluable. A thorough trading journal may include the instrument, what you learned from the trade, and if it was a profit or loss.
iii. Education
Schooling isn’t always over, especially when it comes to CFD trading strategies. The best traders never always stop learning. You should always strive to keep abreast of the best market developments and practice how best to perfect your CFD trades. Learning from successful traders should also help improve your resourcefulness.
iv. Demo Accounts
After completing your research, you will finally have all the capital you need to start trading. This is the perfect time to test out your strategies using a demo account first. Most brokers use these practice accounts to perfect their CFD trading markets.
Volatile Woes
Despite the ASX launching it CFDs, a survey recently showed that the CFD traders and marketers were pilling back due to the ongoing negative performance in its share market. The number of dormant or former CFD traders also increased. This, according to Investment Traders’ 2016 CFDs Report, the number of Contracts for Difference traders and marketers in Australia decreased significantly from 42,000 in 2014 to about 37,000 in 2016.
This seems to fly in traders’ faces who believe that volatile markets provide the best time for trading. This is in line with the thought that large swings can sometimes be very profitable. In theory, this reasoning makes sense. Only that those large swings end up going in every direction except for the predictable ones. If you, therefore, think that the markets may tumble and decide to place an order to sell, they may seem just as likely. At other times, however, the markets may end up going the opposite direction.
Therefore, although capitalizing on hither market volatility provides room for more opportunities and encourage marketers and traders to trade frequently, too much of it may end up having the exact opposite effect.
The survey also determined that the average CFD trading size had fallen significantly from $55,000 to $41,000. However, the traders who were still trading increased their trade frequency.
From this, it’s evident that there has been a modest adoption of the Australian Stock Exchange’s CFD service. This represents just about 1% of the total volume of the Center for Difference trades. Still, the underlying problem is on its volatility and CFD providers who try to appeal to dormant traders to get back into the CFD market after the volatility has calmed. These are just a few of the drawbacks that impact the CFDs trade.
Volatility Effects
To date, you realize that the persistence of volatility share prices in Australia has led to the current number of active CFD traders in the country falling from an estimated 31,000 in 2007 to 26,000 in 2008. This led to an average trade size fall to $41,000 from its $55,000.
However, it still appears that traders’ interests in CFDs are shifting from shares trading to currency, commodity, and index trading. While some years back, CFDs on shares accounted for over 80% of most trading businesses. But it’s currently at only about 15%. In its initial years, traders and marketers considered CFDs an Australian gem and a great means of benefiting from the market’s rise. Now, however, you find that the change in conditions has increasingly made traders use CFDs more as a tool to manage risks instead.
IG Markets’ biggest market as at now is CFDs, which accounts for about 35% of its business. Index CFDs represents over 25% of the business taken. Commodity CFDs have also almost overtaken equities. Thus, the reason why most investors prefer to trade in indices rather than individual stocks, especially in the prevailing environment where stock markets are currently in free-fall.
Stock Markets and CFD Trading in Australia
A study by Investment Trends shows that there’s a growing distrust towards fund management schemes. This comes as a consequence of the global financial recession that hit the country in 2008. The recession contributed to about 8.3% increase in the total number of online share traders, which rose to a record 650,000. With this, you find that Brokerage divisions hold over 84% share of this online trading market. And CommSec is the largest online share broker. This increased its market share to 51% in 2010.
ANZ Banking Group’s ETRADE followed closely with a 17% increase in market share, followed by Westpac Online with about 10% and National Australian Bank’s Online Trading following closely with 6%. The low brokerage costs and ease of using the online trading platform were perhaps the most critical factors in traders’ decisions when selecting a broker.
Presently, CFDs are probably the most commonly used financial products used by private traders in Australia. Even though unconfirmed, it’s thought that Contract for Difference volumes accounts for up to 35% of Australia’s Stock Exchange turnover. Plus, given that CFDs are mostly an over-the-counter product, finding exact figures can be pretty difficult to come by.
Bottom Line
All that said, there’s probably a lot more to CFDs than traders and marketers know. And against all these, exchange trading CFDs offer some great advantages. Visit our website for more information on CFDs and CFD trade. It’s better that you educate yourself on this form of investment and what you can benefit from using it.
