ASIC has released a new guide that aims to provide retail investors with clear, independent advice on how contracts for difference (CFDs) work and the significant risks that can be involved in CFD trading.
The "Thinking of Trading Contracts for Difference?" guide explains why retail investors should consider trading CFDs only if they have extensive trading experience or are used to trading in volatile market conditions and can afford to lose all of, or more than, the money they put in.
"Our research with CFD traders found that many traders don't know or don't appreciate key aspects of how CFDs work, despite the fact that they are actively trading them," ASIC commissioner Greg Medcraft said.
"This guide aims to fill some of these knowledge gaps, especially around the trading risks."
Medcraft said retail investors who use the guide will be able to make more informed decisions as to whether CFD trading is for them.
According to ASIC, the guide includes explanations around how CFDs work, including how trading CFDs differs from investing in shares and the questions that a retail investor should ask a provider before they agree to trade in CFDs.
It also explains the different CFD provider business models, including differences between over-the-counter and exchange-traded CFDs, and common traps to avoid.
The guide can be found on the ASIC and Fido websites.
