CFD stands for Contract For Difference, and as the name suggests, they allow traders to profit on price fluctuations. CFDs derive value from an underlying asset, which puts them into the derivatives category of financial tools. As with most derivatives, you have the advantage of leverage and the ability to trade declining markets with CFDs.
Some CFD trading occurs over the ASX, and ASX CFDs boast the advantage of stringent ASX regulation and the support of the ASX's extensive information network. Not all CFDs are traded over the ASX, and you can find other market makers for CFDs, such as forex CFDs for example.
These traditional CFDs are often called Over The Counter CFDs or OTC CFDs because they are traded between two parties without the use of a stock exchange. While there are mechanisms in place to protect traders, you must be diligent when trading OTC CFDs to avoid an unfair trading scenario.
There are many trustworthy brokers that facilitate OTC CFDs, including some of our biggest banks. In many cases, you can trade international assets (such as shares listed on NASDAQ or other international exchanges), and a good CFD broker will provide you with the tools you need to stay informed.
Make sure you are confident in the transparency and professional practice of your CFD broker. CFDs are complex trading tools that contain a higher degree of in-built risk than some other financial tools, so make sure you understand CFD trading before risking your investment capital.