CFDs - Contracts for Difference

What are they

Higher margins than a margin loan

You don't own the underlying share

You can short

Shorting

I think of shorting as borrowing shares from your provider, selling them on the market with the intent of buying them back later. If the price goes down you can buy them back cheaper. Otherwise its going to cost you more, and you lose money.

If you short and the price of the share doubles, you have lost all the money. If it triples you owe money instead.

There are also interest payments that you will receive. This is the opposite of a margin loan

How does the provider make money

They never lose. If they do then sometimes then money you gave them is unsecured so you won't be getting that back either.

DMA - Commission

With Direct Market Access the provider tends to get a commission per trade. e.g. 0.1% or 20AUD min

Buy/Sell Spreads

This could be above/below the market value. They are getting a cut with every trade.

Interest

If you've gone long and borrowed money to purchase a share, or have shorted a share on their behalf, the provider will give you rates that are worse that the standard RBA rate.

Dividends

If you are short or long and a dividend occurs you may end up having to cover the franking credits of your provider. Remember you don't own the underlying share and aren't entitled to any franking credits.