Contracts for Difference (CFDs) are highly speculative financial instruments that can be used to gain leverage on changes in price for savvy traders. It’s hard to say they are a ‘gamble’ any more than any other financial trade, the leverage involved however does mean that gains and losses can be made far quicker using CFDs than many other financial products, such as more traditional shares or bonds. So is CFD a gamble? Read on.
The Australian Tax Office can regard speculation in CFDs as ‘gambling’, but in a situation that is more akin to horse racing or sports betting. In these situations it does not regard CFDs as being taxable, though, in reality it’s very difficult to prove that when you trade in a CFD you are merely gambling. See my article on are CFDs taxable in Australia for more information.
Gambling is defined as ‘playing games of chance for money’. This definition could be applied to almost any investment, trade or speculation. One of the properties of CFDs that leads people to sometimes group them as ‘gambles’ is that it is possible to lose all or more than all of your initial capital.
CFDs are definitely not for the faint hearted, and can lead to strong gains or losses on small initial capital outlay. It is for this reason that some people may choose to view them as a ‘gamble’.
In my opinion CFD trading is not gambling, as long as you know and fully understand the risks involved and you have carefully analysed what direction you believe the market is heading. CFDs are recognised over-the-counter financial derivatives, and the assets they are traded upon are well known financial markets and commodities.
Of course, just like gambling, in financial markets you can get your trades wrong with respect to the direction the market actually goes. This is where risk and strategy comes in (check out my article here on CFD trading strategies for some tips on how to manage cash, risk and trade the markets).
To summarise, Contracts for Difference are contracts formed on the underlying price movements of a given financial asset. To label them as ‘a gamble’ is really not understanding their specific intention. They are definitely risky instruments, but not gambling in the sense of horse racing, sports betting or the lottery.