| by Preeti | No comments

Trading International Shares With CFDs

The Australian share market counts for about 2% of global share markets by capitalisation.

If you multiply a company’s share price by the number of outstanding shares (meaning shares that have been authorised to, issued to and bought by investors), the value is that company’s market capitalisation. So the market capitalisation of the Australian share market would involve performing this calculation on every company in the share market – and this still only counts for 2% of global market capitalisation!

Consequently, international investments to cover the remaining 98% of the total world share market. However, most Australian share investors and share traders have little or no investment in international markets, and those that do typically hold those investments in collective trusts.

In the conventional share market, there is little access to international shares, with few listed on the ASX (Australian Securities Exchange). There is also unlikely to be much change without increased coverage and marketing, despite the internet giving traders easier access.

Trading Share CFDs

CFDs (contracts for difference) are derivative products, meaning that their value is derived from the value of an underlying asset. In the case of Share CFDs, the value is derived from the value of the underlying shares. CFDs allow you to trade on the change in value of these assets without actually owning them.

So if you open a CFD position on 10,000 Fairfax Media shares, valued at $0.95 a share, the value of your position would be $9,500, just as if you had purchased the shares outright. Share CFDs are contracts that capture every aspect of share trading.

The main difference between traditional share trading and trading Share CFDs is that, with Share CFDs, you don’t need to pay the full contract value to open a position. CFDs are a geared asset, meaning you can open a position with a deposit as low as 5% of the value of that position, granting you wide exposure to the market with lower capital requirements.

In the case of the Fairfax Media shares, you could open a Share CFD position on 10,000 shares of $475 ($9,500 position value x 5% = $475). Then, if the shares rose by $0.10 and you chose to close your position and take your profit, you would make a gross profit of $1,000 ($10,500 closing position – $9,500 opening position = $1,000). That’s a return of 210.5% on your initial investment!

If you bought Fairfax Media shares, you would need to outlay the full $9,500 for the 10,000 shares. If you chose to sell once the shares had risen by $0.10 in value, you would still make a gross profit on $1,000. However, this is only a 10.5% return on your initial investment of $9,500.

Trading international Share CFDs

Not only does trading Share CFDs empower traders to trade with leverage, but it also enables them to trade on international shares, alongside a range of international markets.

Good CFD providers offer CFDs on over 7,000 Australian shares, and thousands of international shares. It is just as easy to trade on both, with online platforms accessible from your computer or smart-phone handset, and trades can generally be executed with a single click. Good trading platforms will also offer a range of market information and charts, on both local and international shares.

The main issue when trading international shares is managing currency risk. Currency risk is when an asset changes in value due to fluctuating exchange rates, meaning that the asset will rise and fall in value with the exchange rate. Having a diverse portfolio is one way to manage it, though finding a CFD provider that offers AUD-denominated CFDs will enable you to avoid taking on that additional risk.

The advantages of trading shares internationally are that traders can extend their trading days beyond Australian business hours, and they can diversify their portfolios to benefit from countries being at different stages in their economic life-cycles.

A good place to learn about Share CFDs is with my favourite trading site, which offers a range of educational tools, including free online seminars and a free demo account of the share trading platform. Open your free account today.

Because forex and CFDs are geared products, trading them can result in losses that surpass your deposit. Trading CFDs might not be suitable for everybody, so please make sure that you fully understand the risks.

Leave a Reply