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Guide to CFD trading in New Zealand

How to select the best CFD trading platform and what risks are involved.

Name Product Minimum Opening Deposit Minimum Opening Deposit Commission Available Markets Platforms
Plus500 CFD
NZD 200
200
No commission
Indices, FX, Shares, Commodities, Cryptocurrency, ETFs, Options
Plus500 WebTrader
CFD Service. Your capital is at risk.
Trade CFDs on shares, forex, crypto, indices, commodities and more.
CMC Markets CFD
NZD 0
0
NZD 7.00
Indices, FX, Commodities, Cryptocurrency, Treasuries, ASX shares, Global shares
MetaTrader 4
CFD Service. Your capital is at risk.
Trade CFDs on shares, forex, cryptocurrency, indices, commodities and more.
BlackBull Markets CFD
$0
$0
No commission
Indices, FX, Commodities
MetaTrader 4, MetaTrader 5
CFD Service. Your capital is at risk.
Trade CFDs on shares, forex, indices, commodities, precious metals and more.
IG Markets CFDs
AUD 0
0
0.08% with $7 minimum
Indices, FX, Shares, Commodities, Cryptocurrency, Options, ETPs
MetaTrader 4, ProRealTime
CFD Service. Your capital is at risk.
Trade from over 17,000 markets with a leading service for CFD trading and forex.
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If you’re an experienced trader or just curious about the industry, chances are you would have heard of contracts for difference (CFD) trading. CFDs are derivative investment products where a trader can speculate on the price movements of stocks, commodities or market indices.

Because you’re trading a contract, rather than owning the underlying asset, CFD traders can profit regardless of whether prices are going up or down. For that reason, CFD trading often becomes more popular during times of market volatility, as traders seek to profit by “shorting” the market when it falls.

What is a CFD?

A contract for difference (CFD) is an agreement based on an underlying asset or financial instrument such as a share, commodity or currency pair. In the contract, you can decide if you believe the underlying asset will increase or decrease in value between the time the contract was initially opened and when it is closed.

It’s important to understand clearly from the outset that at no point do you own the underlying asset itself, nor are you trading the underlying asset. You own the CFD, or contract, which is provided to you by the CFD provider.

Why trade CFDs?

  • CFDs allow you to speculate on thousands of financial products and global markets that you may otherwise be unable to access.
  • You can go long or short, hence you can benefit in both rising and falling markets.
  • You can usually access free demo accounts, plus charts and trading tools through your broker.
  • Unlike other types of derivatives, CFD contracts don’t have a fixed expiry date, meaning you can close out your position (in other words, end the contract to realise a profit or loss), at any time.

How to select the best CFD trading platform

The CFD broker you chose will very much depend on your trading style and what instruments or assets you prefer to use. If you’re looking for the best online platform or app for you, consider the following:

  • Available markets. Does the broker offer forex, gold, silver, cryptocurrency, stock market indices or global stock CFDs?
  • Direct share CFDs. Not all brokers offer CFD trading on shares, and some that do, charge an additional subscription fee to access them.
  • Currencies. If you’re looking to trade forex, check whether your preferred pairings are being offered.
  • Commission fees. There’s often a brokerage fee charged when trading stock and stock index CFDs, check it’s not too high.
  • Live data. Does it charge a fee to access live stock market data?
  • Minimum opening balance. Some brokers require a high minimum opening balance before you start trading – consider trialling the demo version first if it has one.
  • Platforms and software. Which trading platforms do they offer and can you add on software or analytics tools?
  • Other types of trading. Do you also want to invest directly in shares, ETFs, forex or managed funds?

What can you trade with CFDs?

Some of the most common markets you can access with CFDs are shares, indices, commodities like oil or gold, metals like copper and forex in the form of currency pairs.

However, you’re not limited to these. CFDs allow you to speculate on many more markets like Bitcoin and other cryptocurrencies, government bonds and even big events such as national elections. If you want to trade CFDs, you need to fully understand how the CFD itself works as well as the underlying asset. If you have no experience trading shares, for example, it may not be a good idea to buy a shares CFD.

How are margin and leverage used in CFD trading?

Traders are only required to invest a small percentage of the trade’s value to open the CFD trade. This is known as the margin requirement and can be as little as 5% of the full trade value or even less. You could think of this margin as the deposit.

For example, let’s pretend you want to trade Woolworths shares via CFDs, which are hypothetically valued at $10 per CFD. You decide to buy 100 of these CFDs, so the value of the trade is $10,000. With a margin of 5%, you are only required to pay $500 to open the trade.

Even though you only put forward 5% of the value of the trade, you’re entitled to benefit from 100% of the potential gains. This is what makes CFD trading attractive to so many people. Still, it’s important to remember that because you’re trading with leverage, the same applies if your trade was to lose. You’d be expected to pay the CFD provider for the entire loss, which could far exceed your initial 5% margin requirement. Plus, you could also be charged a commission on the trade by the CFD provider.

What are the risks?

CFDs are extremely risky, complex products and are ideally only suited to very experienced financial traders. Here are some of the potential risks that you should know about before deciding if CFD trading is right for you.

  • CFDs are complex. CFDs are very intricate and confusing products. Even if you have a general understanding of what a CFD is, this doesn’t mean you’re ready to start trading CFDs.
  • You can lose more than your initial capital. If you gamble on the pokies, the most money you can lose is the amount you put into the pokie machine. This is not the case with CFDs. If you lose a CFD trade, you can lose much more money than you started with, meaning you actually owe the CFD provider money, sometimes hundreds of thousands of dollars.
  • You don’t own the underlying asset. When trading CFDs, all you own is the contract between you and the CFD provider. Therefore, you can’t benefit from the capital growth of the underlying asset over the long term.
  • CFDs depend on how the market performs. Even though you don’t own the underlying asset, CFDs are still affected by market conditions. This can increase risks even more in a volatile market.

Risk management strategies

While CFDs are risky products that are best suited to experienced traders, there are a few strategies that can be implemented to offset some of the risks.

Risks can never totally be taken out of trading, but this can help limit the downside.

Developing a trading plan

Doing your research and adopting well-developed trading strategies can help you as a trader.

While this won’t necessarily stop your losses, it can help you remain calm in a fast-moving environment.

Your individual trading plan will vary, but it should contain some information about your position size, an outline of your trading strategies and what criteria you need to see in order to break your thesis. A well-developed plan also includes exit and profit-taking strategies.

Stop-loss

A stop-loss is a feature that helps to minimise a trader’s risk when trading CFDs.

Traders can set the stop-loss for a particular price, so when the CFD falls below that price the trade is closed.

This helps minimise your losses by closing the trade at a certain point before it continues to decrease in value.

Take profit points

A take-profit points strategy is when a trader will exit a position in order to lock in some profits. While this could limit some of the upside, it will mitigate against the market turning on you.

A trader implementing this strategy will have a pre-set price in mind and will trade out of a position. This could mean leaving some profits on the table.

The 2% rule

Some traders will implement a 2% rule in order to offset some of the risks they face.

If you are following this rule, then you’ll never put more than 2% of your account’s equity at risk on a single position.

For example, if you’re a trader with $100,000, you’ll never trade more than $2,000 in one trade.

How to decide if CFDs are right for you

Due to the complexity and high level of risk involved, CFDs will not be suitable for the vast majority of traders. CFDs could be right for you in the following situations:

  • You are an experienced trader.
  • You have a strong understanding of not only CFDs but many financial products and markets.
  • You possess a high tolerance to risk and are not at all risk-averse.
  • You can afford to lose quite a bit of money (it’s not guaranteed that you will, but you need to be comfortable you can afford to lose if you did).
  • You have some level of legal expertise to understand the complexity of CFDs.
  • You are not interested in owning the underlying assets.
  • You understand the measures available to minimise your risk and are experienced using these tools, such as stop-loss orders.
  • You have conducted plenty of research – trading CFDs is not a decision that should be taken lightly.
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Wait, I still have more questions!

CFD and share trading glossary

  • Ask or ask price. This is the price at which you can buy CFDs.
  • Bid or bid price. This is the price at which you can sell CFDs.
  • CFD (contract for difference). This is a contract entered into by 2 parties who agree to exchange money according to the change in value of an underlying asset.
  • Contract currency. This is the currency in which a particular asset is traded.
  • Dealing. Dealing is when you open or close a CFD position.
  • Derivative. A financial instrument whose price is derived from an underlying asset.
  • Going long. When you open a buy position.
  • Going short. When you open a sell position.
  • Hedging. Taking an opposite position to reduce the risk associated with an initial position.
  • Initial margin. This is the minimum deposit required when you wish to open a CFD position.
  • Leverage. Leverage allows you to trade a larger value asset than the worth of your initial investment. This is sometimes also referred to as gearing.
  • Open interest. This is the interest rate that applies to all CFD positions that are held open overnight.
  • Stop-loss. A stop-loss order can be placed when a CFD position is opened and is triggered when the price reaches a specified level. These orders are used to close out positions that have resulted in a loss and aim to prevent further loss.
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Important information: Powered by finder.com. This information is general in nature and is no substitute for professional advice. It does not take into account your personal situation. This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for most investors. You do not own or have any interest in the underlying asset. Capital is at risk, including the risk of losing more than the amount originally put in, market volatility and liquidity risks. Past performance is no guarantee of future results. Tax on profits may apply. Consider your own circumstances, including whether you can afford to take the high risk of losing your money and possess the relevant experience and knowledge. We recommend that you obtain independent advice from a suitably licensed financial advisor before making any trades.

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