Australia’s contracts for difference (CFD) market is set to more than triple in the next five years, according to GreenCFD managing director Goran Drapac.
CFDs are a relatively new tool to Australia allowing investors to trade on the rise and fall of local and global markets without needing to physically own the underlying assets, giving access to greater leverage and the ability to go long or short.
Drapac estimates that 5 per cent of all equities trades in Australia are CFD related, while in the UK this figure is thought to be 30 per cent.
Based on the UK’s CFD history, he forecasted that in three to five years time, 20 per cent of the Australian Stock Exchange’s volume would be CFD related.
Drapac said many investors found CFDs an ideal risk management tool for their existing shareholdings through the ability to take a short position in the CFD market on an anticipated price fall.
Therefore, instead of allowing a client’s shares to sit idly in their portfolio, he suggested financial planners hedge the shares with CFDs.
He said this meant shareholders could lock in profits of share positions by going short with CFDs when the market started to correct, instead of the traditional process of holding in times of uncertainty.
However, the potential for higher returns comes with an element of risk and Drapac recommends advisers consider their clients’ individual circumstances before deciding on a level of exposure and to also utilise a stop loss option as a safety net.
“Say you bought a stock at $1, you can give an order so that if the stock trades at 90 cents or below you are automatically taken out of the trade,” he said.
“That way, you can invest and have all the benefits of leverage and still have a stop loss.”
