There are a wide variety of brokers available and the following points are important to consider when choosing a CFD Broker.

Three Different CFD Models

There are three ways you can trade CFDs:

- Market Maker

- Direct Market Access (DMA)

- ASX CFDs

Market maker orders are executed directly with the CFD Broker and the CFD Broker may, or may not, buy the underlying instrument as protection for the position.

Direct Market Access (DMA) orders are placed directly into the underlying instrument by the CFD Broker and when it trades in the physical market your order is executed.

ASX CFDs are traded more like stocks with orders placed into a central auction facility run by the Australian Stock Exchange. Buyers and sellers are matched up by the ASX for the trades to be executed.

What Do You Want To Trade?

The easiest way to choose between these three execution models is to determine what you are likely to trade. To trade overseas shares, indices or currencies, you will have to choose a market maker model or a limited selection is available through the ASX CFDs.

If ASX stocks are you trading instrument of choice then you can use all of these methods to execute your trades. DMA (Direct Market Access) is available on ASX stocks only.

Step 2 for Choosing a CFD Broker

The choice now comes down to whether you wish to use guaranteed stops and once again pushes towards the choice of a market maker platform, although Macquarie does offer guaranteed stops on a DMA model.

To trade during the auctions at open and close you will have to use either DMA execution or ASX CFDs. The market maker model does not allow you to participate in the opening and closing auctions.

If you want complete transparency, where orders that you place are visible in market depth you will opt for the ASX CFDs or DMA execution.

Which Platform Do I Use?

Whichever CFD broker you use there are a wide variety of trading platforms available. Trading platforms typically include quotes, charts, and news feeds. All your CFD trades can be executed through these platforms with a variety of different types of orders.

Test drive the platforms using the free trials that the CFD brokers offer to find one that suits you. The trading platform will often make the decision for you on which is the best CFD broker.

Decide what it is that you want to trade and how you want to do that, to help you select the CFD broker that will work best for you.

The Australian Stock Exchange (ASX) has recently listed ASX CFDs for stocks, indices, currencies and commodities. The ASX CFDs are identical to the CFDs issued by other CFD providers in the market, but there are a few differences in the way they trade.

How to Trade ASX CFDs

To trade ASX CFDs you have to open an account with a broker that has been approved to trade ASX CFDs. CFDs are then traded like shares with orders placed into a central order book and executed on a price and time basis. The first order placed at a set price is always traded first.

Because the ASX provides a central market place and standardises the CFD contracts it is possible to buy an ASX CFD through one broker and sell it through another broker. This is not possible when you use other CFD providers as all positions opened with the CFD provider must be closed with the same CFD provider.

ASX Guarantees Their CFDs

The ASX stands behind their CFDs with their guarantee fund which can be called on if a broker was to default. Other than the requirement of ASIC to segregate client money from that of the CFD provider, there is no guarantee in the event that a CFD provider was to default.

The ASX CFDs offer a unique feature which allows a trader to swap the CFD position for a physical position in the underlying stock. This can be achieved at the exact same price and is conducted by the broker as an off market transfer. This is not available if you are trading with other CFD providers.

Disadvantages of ASX CFDs

ASX CFDs suffer from a lack of liquidity as they rely on other traders to take the other side of the trade. When trading with OTC (over the counter) CFD providers the CFD provider always takes the other side. Liquidity is equivalent to the underlying instrument in the OTC CFD market.

The other mechanics of ASX CFDs are very similar to Contracts for Difference (CFDs) issued by other CFD providers.

CFDs have taken the trading world by storm. Now take advantage of this revolution and learn CFDs yourself. CFDs offer the trader access to leverage to super size your returns. A deposit of just 1% will allow you to trade at leverage of up to 100 times. An investment of just $100 allows you to trade up to $10,000 of a currency, commodity, index or stock.

Amplify Your Results with Contracts for Difference (CFDs)

This means a small profit is magnified many times over when trading CFDs. Consider buying 1000 BHP Billiton at $29.00. Traditionally a trader would have to spend $29,000 to do this and if they were able to sell BHP at $32.00 the trader makes a gain of $3,000 or 10.3%.

When you learn CFDs you can buy 1000 contracts of the stock for a 5% margin or just $1,450 down. If you were able to sell your stock at $32.00 you still make a gain of $3,000 but your return has skyrocketed to 206%. Now you can see the power involved if you were to learn CFDs.

Learn to Manage Your Risk with CFDs

But not every trade goes as planned and it is important to learn how to manage your risk when trading CFDs. The market is a good teacher and you will learn this one way or another. When you learn CFDs you will know how important it is to understand and know the risks before you start trading.

Profit When the Markets Fall with Contracts for Difference (CFDs)

The opportunity to learn CFDs opens a door to making money when markets fall. CFDs can be used to profit on the way down as well as the way up. You do not have to sit on the sidelines waiting for a reversal as it is very easy to short sell with Contracts for Difference (CFDs). And trading CFDs short is easy when compared to options or warrants.

Choose When You Want To Trade

CFDs are available for a wide variety of markets from commodities to indices, stocks to currencies. With such a wide selection of markets there is something to trade 24 hours per day. So pick a market to trade that works in with your schedule.

Start trading CFDs today and learn CFDs.

Being a relatively new trading instrument there was no taxation ruling on CFDs when they arrived in Australia in 2002. Applying existing legislation to Contracts for Difference made them tax free as the closest link was to gambling. Some might assume that CFDs and gambling are closely related the Australian Tax Office did not agree. They fast tracked legislation that addressed tax on CFDs.

Talk To Your Tax Advisor

It is important that you consult your own accountant or tax adviser when it comes to tax time. Everyone’s financial situation is unique and the general guidelines here may not address all aspects of your tax situation. This is a guide to the interpretation of legislation regarding CFDs in Australia.

CFD Profit is Treated as Income

Any profit made when trading CFDs is treated as taxable income, and any losses made reduce taxable income. So the income for tax purposes is the net income calculated by adding up all your profits and taking away all your losses.

Maximise Your Tax Deductions

Any expenses associated with trading CFDs can be tax deductible. This includes costs like internet fees, any interest, brokerage or trading platform charges. These can be claimed to reduce your taxable income.

CFDs and Capital Gains

Holding a CFD position for 12 months or more to claim a capital gains discount is not a useful strategy when trading CFDs. Your gain or loss is treated as income so capital gains tax does not apply. Likewise franking credits on dividends are not received when trading CFDs so these cannot be claimed.

CFD Tax Outside Of Australia

There are a few things to watch if you are outside of Australia as well and once again tax advice from a local accountant is important. In New Zealand it may pay to trade Contracts for Difference (CFDs) through a different entity so you are not classified as a trader by the IRD which could potentially impact your investments. In the UK spread betting remains non taxable, but the penalty for a trader is a wider spread paid on each transaction.

The Last Word On Tax on CFDs

While it is vital for you to know your taxable situation this is not the reason to trade CFDs. It is not a wise investment decision to lose $1 to save 30 cents.