What are the different types of contracts for difference (CFDs)?

Learn about the 3 types of contracts for difference (CFDs) available in Australia.

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CFDs are contracts between a buyer and seller that demands the seller pay to the buyer the difference between the current value of a share and its value when the contract is settled. If the difference is negative, then instead the buyer pays the seller.

Many investors like to use CFDs because they can be easier to understand compared to other derivatives. However there is more than one type of CFD available.

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Main types of CFDs

If you decide to open an account with a CFD provider, you should decide what type of CFD you want. In Australia there are three avenues to access CFDs"

  • Direct Market Access (DMA)
  • Market maker
  • Exchange-traded

Trading CFDs via market makers and DMAs are the most common methods in Australia and around the world, whereas exchange-traded CFDs are provided by the Australian Securities Exchange (ASX).

What is a DMA CFD?

DMA is the term used for electronic facilities, often provided by independent firms, that permit particular investors or financial firms to access liquidity to trade securities they want to buy or sell.

Typically, these authorised firms or investors are usually brokers, dealers and banks that act as market makers. Generally they're a broker or dealer holding a certain number of shares of a particular security (at its own risk) in order to facilitate trading in that security.

By using a DMA, the investor can manage its account and trade directly without the intermediation of brokers and dealers. This means that the trader can access the infrastructure of the sell side firms with lower costs and commission.

What are the pros and cons of using DMA as a CFD?

DMA has opened the door to the individual trader who wants to participate in CFDs themselves rather than handing the order and trade to brokers for trading. The individual trader now has the opportunity to bypass the middle man and send the trade directly to the execution desk to finalise and uphold the integrity of the trade.

The benefits you can get from DMA are:

  • You can set your own trading goals and change them when you feel it is appropriate without wasting your time contacting a trading specialist.
  • You can take more or less risk depending on your past performance or on your trading skills and experience.
  • The electronic environment allows fast transactions and fewer price differences or discrepancies than you could experience if you placed an order with a broker or dealer.
  • Everything you do is based on your own decisions: you can use more or less liquidity and buy/sell only when it suits you.
  • It is a great resource for skilled and experienced traders; if you are a newbie, it's better to contact a trading specialist or financial advisor.

The cons are:

  • If you are an inexperienced investor you could risk losing profits or even lose money as you might not be able to read trends in time.
  • If there's insufficient trading in the underlying market, you won't be able to open and close CFD positions.
  • There is a smaller offer range than with the market maker.

Compare DMA CFD accounts

Updated October 14th, 2019
Name Product Minimum Opening Deposit Major Trading Instruments Commission (ASX 200 Shares) Platforms
AU$100
Indices, FX, Shares, Commodities, Cryptocurrency, ETFs, International futures
No commission
Plus500 Web Trader
CFDs are complex financial products and traders are at high-risk of losing all of or more than their initial investment.
Finder exclusive offer: Open a new trading account and receive a welcome bonus of AU$120 when you deposit your first $400 and enter the bonus code “Special200”. T&C’s apply.
Trade Australian and international CFDs on shares, forex, indices, commodities and more.
$0
Indices, FX, Shares, Commodities, ETFs
0.08% with $5 minimum
MetaTrader 4
At Pro
Advantage Web
CFDs are complex financial products and traders are at high-risk of losing all of or more than their initial investment.
Special offer for new customers: Get a cash bonus of up to $1,000 when you open a new account with City Index and meet minimum deposit and trade requirements. T&Cs apply.
Trade CFDs on indices, FX, global & Australian shares and commodities, plus access other markets such as metals, bonds and interest rates.
$0
Indices, FX, Shares, Commodities, Cryptocurrency, ETPs
0.08% with $7 minimum
MetaTrader 4
ProReal Time
CFDs are complex financial products and traders are at high-risk of losing all of or more than their initial investment.
Introductory offer: Build confidence by trading at lower minimum trade sizes for the first six weeks. Plus, receive a reduced commission on Australian shares CFDs. T&C's apply. Trade from over 15,000 markets with Australia's leading service for CFD trading and forex.
AUD$3,000
Indices, FX, Shares, Commodities, ETFs
0.10% with $6 minimum
SaxoTraderGo
SaxoTrader
CFDs are complex financial products and traders are at high-risk of losing all of or more than their initial investment.
More than 9,000 CFDs including single stocks, stock indices and commodities
AU$200
Indices, FX, Shares, Commodities, Cryptocurrency, ETFs
No commission
eToro Trading Platform
CFDs are complex financial products and traders are at high-risk of losing all of or more than their initial investment.
Join the largest social trading network in the world.
US$200
Indices, FX, Commodities, Cryptocurrency
No commission
MetaTrader 4
MetaTrader 5
cTrader
CFDs are complex financial products and traders are at high-risk of losing all of or more than their initial investment.
Trade stock indices on the global market, via Pepperstone's MetaTrader 4 and cTrader client terminals.
AU$1,000
Indices, Shares, Equities, Commodities, Futures
0.10% with $10 minimum
IRESS
CFDs are complex financial products and traders are at high-risk of losing all of or more than their initial investment.
Trade CFDs with FP Markets using the IRESSTrader platform. Trade CFDs on international equities, futures and forex.

Compare up to 4 providers

Disclaimer: Trading in financial instruments carries various risks, and you can lose more than your capital. This article may contain general advice. You should always seek professional advice when deciding if a product is right for you.

What is a Market maker CFD?

This is a trading company that creates its own market and determines the price range for the underlying asset on which the CFDs may be traded. It creates both the buy and sell price for a financial instrument or a commodity. So if you buy a CFD over a particular asset you are a price taker (not a price maker as in DMA).

The prices, however, do not differ from the market price of the underlying asset.This means you have to deal through a broker or a dealer and do not have access directly to the market as with DMA.

What are the pros and cons of a Market maker?

The pros are:

  • The assets gain more exposure as they reach a wider range of markets because of a higher degree of liquidity in the market.
  • If you are a newbie, you could get some advice from your broker or dealer on how to invest in these types of CFD.
  • Higher liquidity means that you can trade even if there's insufficient trading in the underlying market.

The cons are:

  • Higher brokerage and commission fees.
  • The risks are more or less the same as those of volatile markets.
  • You must accept the price of the trader (even when it sets a higher price than the market: the so-called extra margin or spread).
  • The broker has the right to re-quote the prices after submitting an order.

What is an Exchange-traded CFD?

This model allows you to trade CFDs that are listed on the ASX and these CFDs can only be traded through brokers or dealers authorised to trade them. The ASX has also created standardised terms and conditions in order to reduce the risks, as this market is separate. As in the DMA environment, people who trade determine the prices and so are called price makers. The CFD price follows the market price of the underlying asset (even if they are two separate markets).

All the trades are processed, registered and cleared by ASX24, part of the ASX Group. This means that buyers and sellers do not deal directly, but through the ASX24. This reduces the so-called 'counterparty risks'.

A counterparty risk is the risk that the counterpart fails to fulfil its obligations. An example might be that you buy a CFD from XYZ company and then you sell it at a higher price. If your counterpart cannot pay the difference between the exit price and the entry price, you do not make any profit. As you don't deal directly with a broker or seller, the ASX guarantees the obligation.

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What are the pros and cons of Exchange-traded CFDs?

The pros are:

  • The counterparty risk is reduced consistently.
  • If you are a newbie, you can use the consulting services of your broker or dealer.

The cons are:

  • Higher brokerage and commission fees.
  • If you are an experienced trader you cannot trade directly. You need to open an account within the brokerage platform.

As you can see, there are a range of possible trading strategies using these different types of CFDs that can you help you achieve your investment goals. Remember to consider your buying power and how the markets are performing before choosing which CFD to use.

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