CFD Trading vs. Share Ownership in Australia: A Practical Comparison

When you visit the different investing forums in Australia today, you will see that there are two tribes that cross-talk in a polite manner. One party is concerned with the long-term impact of compounded returns on purchasing shares in ASX, getting franking credits, and experiencing relative tranquillity of reduced daily price movements. The other focuses on Contracts for Difference (CFDs), which have the ability to go long or short, hedge or leverage with a notional value only a fraction of the actual notional value. Even though all instruments are used differently, they aren't usually used interchangeably at varying times by the same person or in varying contexts.

This article explains the mechanics, tax implications and major risks of each method of retail and self-managed super fund (SMSF) investors under the Australian regulation.

CFDs Explained: Understanding "CFD Trading Australia"

A simple internet search for "CFD trading Australia" typically returns broker advertisements highlighting margin-based access to a wide range of markets. A CFD is simply a bilateral contract between you and your broker to swap the difference in price of an underlying asset between the time you open and close a position. You never take ownership of the share, currency pair or commodity. Since you only have to pay a margin (typically 5% to 20% of the value of the asset), there is leverage that will magnify profits and losses.

Importantly, CFDs fall under the product-intervention powers of the Australian Securities and Investments Commission (ASIC) as over-the-counter (OTC) derivatives. Since March 2021, the Australian Securities and Investments Commission has limited the amount of leverage available to retail investors (e.g., 30:1 for major currency pairs and 5:1 for shares) and automatically closed out positions at 50% of the required margin. This has reduced, but not removed, the possibility of significant losses that garnered media attention in the 2010s.

How Share Ownership Works in Australia

Purchasing ordinary shares on the ASX directly or through the Cboe Australia system is a straightforward process. You enter an order with a CHESS-sponsored broker and pay for the shares two business days later (T+2); your name goes on the share registry. At that point, you literally do own a piece of the company and have:

Voting rights at AGMs
Your share of dividends (franked or unfranked)
A share in the capital gains (or losses) while you own

Share investors also have the benefit of an old-school tax structure. The tax concessions around capital gains (CGT) on assets held for more than 12 months, a 50% discount for individuals, and a one-third discount for complying superannuation funds in the accumulation phase, as provided in Division 115 of the Income Tax Assessment Act 1997 (Cth), and the tax credits that come with some dividends (franking credits) operate under the dividend imputation system in Division 207 of the Income Tax Assessment Act 1997 (Cth). These features of the Australian tax system can affect after-tax outcomes for long-term holders, though their precise impact depends on each investor's circumstances.

Structural Differences That Matter

Before we move on to the sub-topics, let's backtrack and recognise that CFDs and shares are in different legal worlds. The underlying form of "ownership" and the clearing and settlement of transactions, as well as the underlying guarantor of performance, can differ materially. These differences, in turn, flow through to costs, trading hours and even human psychology.

Ownership vs. Contractual Exposure

If you own shares, you own an interest acknowledged by the Corporations Act and the company constitution. With CFDs, you have an obligation to the broker. In liquidation, you are an unsecured creditor. Large brokers separate the funds of retail investors, but that does not eliminate counterparty risk, something that is not mentioned in their marketing.

Market Access and Trading Hours

You can trade 24 hours in CFD, in global indices, commodities and even cryptocurrencies. The ASX shares can be traded between 10 a.m. and 4 p.m. (Sydney time, including the opening and closing auctions) in the form of a portfolio. The extended session assists in regulating the news flow in the night, though it further adds the trading decisions to be made by an investor.

Transaction Costs

The cash share commission is between $5 and 20 per trade and bid-ask spread. Most CFD brokers have a massive majority of their commissions charged on equity index trading which is free of commission but they make money:

Wider spreads
The cost of financing (swap) of leveraged trades
Conversion fee on foreign exchange

In jobs occupied longer than a few days, financing charges can significantly reduce what would otherwise be a big percentage profit.

Tax Treatment: Apples to Apples (SMSF Perspective)

Tax treatment can materially influence net returns. The Australian Taxation Office (ATO) uses a different set of rules when investing in a bank share that you have held for years than when trading a CFD over a few hours, and this will impact your after-tax percentage gain. Determining which item - capital or revenue - each instrument is is crucial to SMSF trustees who sign the annual financial report. The treatment is very fact-specific, and investors are well advised to seek independent tax advice prior to relying on any specific treatment.

Capital Gains and Franking Credits

The gains on sales of shares are capital gains. The CGT discount (50% in individuals and one-third (approximately 33%) in complying superannuation funds in accumulation) is available to investors who hold a CGT asset longer than 12 months under Division 115 of the Income Tax Assessment Act 1997 (Cth). Dividends are paid after company tax, and the imputation system franking credit may enhance the value of a dividend to eligible taxpayers at their marginal rate, depending on the holding period and other conditions in Division 207 of the Income Tax Assessment Act 1997 (Cth).

CFDs produce no dividends and no franking credits. ATO Tax Ruling TR 2005/15 (Income tax: tax consequences of financial contracts for differences) addresses the tax treatment of CFD gains and losses and indicates that profits and losses are generally characterised as revenue (ordinary income) rather than capital, as they are profits or losses from trading a derivative. That means:

No CGT discount
Gains are taxed at the full marginal rate (15% in an SMSF, 0%/10% in pension phase, depending on ECPI)
Losses can be used to offset other revenue but not capital gains

Income vs. Revenue Trading - What the ATO Watches

If you operate a share portfolio as a trading business - high volume, computerised systems, or investor status as a share trader - then even shares can be taxed on revenue account. Intention, regularity and organisation are key. SMSF trustees must take care in their investment strategy minutes to justify a capital-account position.

With CFDs, the default is the other way round: few retail investors hold a CFD contract for ten years. ATO Tax Ruling TR 2005/15 provides the ATO's general position on how CFD transactions are characterised, though it notes that the outcome depends on the particular facts. Trading logs need to record every open, close, and rollover position if you are to claim swap costs or losses. Independent tax advice is recommended before adopting any particular position, as the ATO's view and the applicable legislation may change.

Margins, Risk and Poor Psychology

The numbers on the screen may look identical, whether they represent a lot of shares or a leveraged derivative, but the risk is most certainly not. It's important to understand the effect of amplified volatility and counterparty risk, as well as human behaviour, before initiating any order in a trading system.

Volatility Amplification

A 10% fall in a $10,000-share parcel costs you $1,000. The same price move in a 5:1 leveraged CFD account you funded with $2,000 takes out half your margin. At 20:1, you are stopped out before the stock moves 2.5%. The ASIC report revealed retail CFD accounts continued to lose 68% of the time despite leverage caps - down from 72% before the ban came into effect, but not much of a win.

Counterparty and Liquidity Risk

Blue-chip stocks listed on the ASX have deep books and clearing via ASX Clear Pty Ltd, the central counterparty operated under the ASX Clear Operating Rules. CFD brokers operate a dealing desk or hedge selectively in the interbank market. In March 2023, US banking fears prompted a number of Australian CFD brokers to increase spreads on CFDs on shares of regional Australian banks tenfold, triggering margin calls that the underlying shares themselves would not have triggered. Liquidity loss is a poorly recognised risk until it happens.

Behavioural Over-Trading

It is easy to get addicted to the ability to open a position in seconds with 5% equity in the palm of your hand. A new study has shown that CFD traders have "hyperactive" trading patterns, with hundreds of round-trips a quarter, compared to direct-equity investors. This trading is associated with negative returns net of costs. The design of modern trading platforms - blinking prices, immediate leverage settings, and push notifications - can prompt rapid action.

Different Applications for Each Instrument

No one size fits all when it comes to shares and CFDs. There are times and places for each depending on the investment timeframe, tax situation and risk profile. Here is a contextual overview of how investors sometimes employ each instrument within an Australian portfolio.

Build Wealth and Dividends

Direct share ownership is available and gives access to the above-described tax concessions and corporate governance benefits. Those shareholders who invested in an SMSF directly can possibly access:

Clear statutory protection (CHESS) as outlined in ASX Settlement Operating Rules.
CGT concessions on assets that are in excess of 12months and is limited by the provisions of the Income Tax Assessment Act 1997 (Cth) Division 115.
Dividend imputation credits, which are liable to the holding period rule and other requirements in Division 207 of the Income Tax Assessment Act 1997 (Cth).

Short-Term Speculation, Hedging or Cash-Flow Management

Investors tend to use CFDs to trade:

In an attempt to hedge risk in a stock portfolio before the release of earnings.
Going on temporary access to exposure to an offshore index without converting it to a direct currency.
Borrowing to go short on a stock they believe to be overpriced when they cannot directly short the stock on the ASX.

In an attempt to manage risk, many market players who trade CFDs tend to restrict the size of their positions and use lower leverage ratios (e.g. 1:1.5 or 1:2) than the maximum ratio of 1:5 allowed under the ASIC regulations. Leverage use by each investor will be based on own situation and risk tolerance as well as on the terms of the product disclosure statement of their CFD provider.

Self-Assessment Questions

No matter which instrument is used, it is significant to determine the purpose, method and time of any position. Investors tend to consider the following questions, and it is only a general education tool and not personal advice.

Time horizon. How long do you plan to serve in the position?
Tax treatment. Have you received independent tax advice on the treatment of gains, losses, and income of the instrument in your particular circumstances, including the application of TR 2005/15 when considering CFDs?
Leverage. Do you know how margin calls work and the possibility of losing more than you deposited?
Platform and licensing. Is your CFD broker licensed by the Australian Financial Services Licence (AFSL), and is it in accordance with the client money segregation requirements under Part 7.8 of the Corporations Act 2001 (Cth)?
Execution discipline. Have you documented your approach to position sizing, stop-loss settings, and maximum acceptable drawdown before you open a position?
Record-keeping. If investing through an SMSF, does your fund's investment strategy document permit the use of derivatives and address the associated risk management obligations under the Superannuation Industry (Supervision) Act 1993 (Cth)?

Documenting responses can clarify decision-making. A written record does not assure success but may improve discipline.

Final Thoughts for the Retail Investor

Available data suggest that many Australians have built wealth primarily through share ownership, with corporate governance standards, tax concessions, and long investment horizons all playing a role in that outcome. CFDs, by contrast, are complex leveraged derivatives that can amplify both gains and losses and therefore demand a high level of knowledge and risk control.

Some market commentators describe CFDs as a supplementary instrument rather than a core holding. Whether that characterisation applies to any individual investor is a matter for them to assess in consultation with a licensed financial adviser, having regard to their own objectives, financial situation and needs. Keeping speculative positions separate from retirement savings is a matter each SMSF trustee will need to consider in the context of their obligations under the Superannuation Industry (Supervision) Act 1993 (Cth) and their fund's investment strategy. No general article can substitute for independent professional advice tailored to your situation.

ASIC Risk Warning: CFDs are complex products that carry a significant risk of losing money rapidly due to leverage. ASIC data indicate that the majority of retail investor accounts lose money when trading CFDs. Before trading CFDs, you should read the relevant product disclosure statement and consider whether the product is appropriate for you, having regard to your objectives, financial situation, and needs. ASIC's product intervention order (ASIC Corporations (Product Intervention Order - Contracts for Difference) Instrument 2020/986) remains in force as at the date of this publication.

General Information Only - Not Personal Advice: This publication is provided for general information and educational purposes only and does not constitute financial product advice, investment advice, tax advice or a recommendation to deal in any product. It has been prepared without taking into account your objectives, financial situation or needs. You should seek independent professional advice before making any investment decision.